Deutsche Bank sees BSP maintaining reserve reqm’t

By Lawrence Agcaoili

MANILA, Philippines -  Deutsche Bank does not see the Bangko Sentral ng Pilipinas (BSP) cutting the amount of funds held by banks in their cash vaults due to substantial capital outflows and the weak peso.

In a special report on the Philippines, Deutsche Bank economist Diana del Rosario said the substantial resident outflows and sharp depreciation pressure for the peso would have to occur for the reduction of the reserve requirement ratio (RRR).

She pointed out the BSP remains committed to a medium-term reduction of the RRR from its current level of 20 percent.

“The timing, however, is uncertain as domestic liquidity remains ample. It was mentioned at the meetings that the bank could time the RRR adjustment to the US Federal Reserve’s balance sheet reduction, which may happen in the latter half of the year,” Del Rosario said.

Philippine banks are required to comply with a RRR of 20 percent, the highest in the region. This is the amount of funds a bank must hold in its cash vault or deposit with the central bank against certain liabilities.

It affects the money supply in the financial system at any given time as a one percentage point cut in reserve requirement can release P60 billion into the system.

Market rates have moved closer to the policy rates as envisioned under the interest rate corridor (IRC) system launched in June last year, making the transmission of monetary policy more effective.

The BSP uses the overnight deposit facility (ODF) and the term deposit facility (TDF) to mop up excess liquidity in the financial system.

The benign inflation environment and robust domestic demand have allowed the BSP to keep an accommodative policy stance, keeping key policy rates steady since a 25 basis point increase in September 2014.

Inflation eased to a five month low of 2.8 percent in June from 3.1 percent in May, bringing the average to 3.1 percent in the first six months. The BSP has set an inflation target of between two percent and four percent for this year.

“We left the BSP with the impression that it is in no rush to lift rates. To be sure, the central bank continues to see upside risks to its inflation outlook, primarily from possible further adjustments in power rates and wages, as well as the transitory impact of the proposed tax reform, while it expects a small inflationary pass through from the peso’s weakness,” she said.

Del Rosario said the recent drop in oil prices could also only dampen consumer price pressures.

The economist explained the downside risks to inflation could be limited by the decision of President Duterte to extend the quantitative restriction (QR) on rice imports for three years after it was supposed to have been phased out last June 30 as part of the country’s commitment to the World Trade Organization (WTO).


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