BSP chief hopes to cut rates in 2024

THE BANGKO SENTRAL ng Pilipinas (BSP) may cut key benchmark rates in 2024, as well as lower the reserve requirements for banks in the first half of 2023, its chief said on Thursday.

“Now hopefully by 2024, when pent-up demand is gone, then monetary policy hopefully at that time will be much looser than what we have now. How much looser? I don’t know. Of course, so many things can happen,” BSP Governor Felipe M. Medalla said in a speech at the Rotary Club Manila meeting.

However, Mr. Medalla told reporters that monetary policy would still depend on what the US Federal Reserve does, saying the policy tightening in the United States “is far from over.”     

The US Federal Reserve increased rates by 425 bps last year, bringing its policy rate to 4.25-4.5%.  The Fed has signaled it will continue tightening this year to tame inflation.

“Even though we’re quite confident that inflation will normalize, I cannot say that we will have rate cuts before the end of this year. But hopefully 2024,” Mr. Medalla said.   

The BSP governor earlier this week flagged a 25-basis-point (bp) or 50-bp rate increase at its first policy meeting this year on Feb. 16.

The Monetary Board raised borrowing costs by 350 bps in 2022, to curb inflation and support the peso. This brought the policy rate to a 14-year high of 5.5%.   

Mr. Medalla also hopes that the series of rate hikes would be enough to tame inflation and prevent any second-round effects this year.   

Inflation rose to a 14-year high of 8.1% in December, bringing the full-year average to 5.8%. The BSP sees inflation easing to 4.5% this year and 2.8% in 2024.   

RRR CUT

Mr. Medalla said there is a high probability of cutting the banks’ reserve requirement ratio (RRR) in the first semester of 2023.

“Cutting the RRR is very important to us. The only reason we postponed this is because (when) we did this in the past, it confused the markets,” Mr. Medalla said.

A cut in RRR is a move intended to be an operational adjustment to facilitate the BSP’s shift to market-based instruments for managing liquidity in the financial system, particularly the term deposit facility and the BSP securities. 

The RRR for big banks is currently at 12%, one of the highest in the region. Reserve requirements for thrift and rural lenders are at 3% and 2%, respectively.

In March 2020, the BSP cut big banks’ RRR, or the percentage of deposits and deposit substitutes they must keep with the central bank, by 200 bps to 12%.

The BSP earlier committed to bringing down the RRR of big banks to single digits by 2023.   

Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri, Jr. said the central bank is taking the right direction regarding the reserve requirements.

“Cutting RRR improves the competitiveness of local banks and should benefit bank customers as it lowers the cost of intermediation. It’s crucial that the sequence is done right,” Mr. Neri said in a Viber message.   

“It’s better for a policy rate cut to give way to an RRR cut as doing the opposite could lead to another postponement of a long-standing commitment to sharpen, so to speak, BSP’s policy tools. The RRR is a blunt policy tool being replaced by more precise and preventive ones like macro prudential measures,” he added.   

For ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa, the move to reduce the RRR is a welcome development and it should be well-timed to avoid confusion on the BSP’s policy stance.   

“In 2023, with less pressure on the peso and with the current governor indicating that the rate hike cycle is winding down, the RR (reserve requirement) reduction can take place in an orderly fashion,” Mr. Mapa said in an e-mail. 

“Furthermore, [Mr.] Medalla expressed the intention to reduce RR to offset the expiration of pandemic-era accommodation for lending to (small and medium enterprises). This should further ensure an orderly transition away from RR to market-based tools such as the BSP deposit facilities and bills,” he added.

During the pandemic, the BSP allowed lenders to count their lending to micro, small, and medium enterprises and pandemic-hit large enterprises as part of banks’ alternative compliance with the RR against deposit liabilities and deposit substitutes until the end of 2022. – Keisha B. Ta-asan, Reporter