Long before its actual implementation, the economy, particularly the local currency, has been feeling the effects of the recent surprise move from the Bangko Sentral ng Pilipinas (BSP) to cut its reserve requirement ratio (RRR) to 19 percent just last Thursday.
Markets speculated on the effects of the one-percentage-point cut in the banks’ deposit requirement to the economy and to BSP’s policy direction, thereby sending the peso into a downward spiral a full week before the actual implementation of the cut on March 2.
At the start of the week, the peso fell to 52.34 to a dollar, abruptly losing 34 centavos during the day from the previous week’s 52-to-a-dollar closing rate.
The local currency has not been this weak since the precrisis levels. The last time the peso has been this low was on July 19, 2006, when it hit 52.745 against the dollar. The peso started to recover toward the week’s end, but remained above the 52 territory.
Traders and analysts have been attributing the peso’s weakness to the rising speculations of the market behind the BSP’s move to cut the banks’ RRR—a move that will effectively release about P70 billion to P90 billion of liquidity into the economy despite rising inflation prospects.
ING Bank Manila economist Joey Cuyegkeng said the Central Bank’s decision to cut banks’ RRR was “another indication that BSP is in no mood to fight inflation.”
This is after the BSP, a week before cutting its RRR, decided to keep policy settings steady despite inflation prospects breaching the inflation target range this year. The Monetary Board projected a 4.3-percent rise in inflation on average for 2018. The BSP’s target is for inflation to fall within 2 percent to 4 percent this year.
Bias for growth
Cuyegkeng also said the BSP seems to frame its move to keep the local economy growing above 6 percent, at the expense of transitory inflationary shoot-ups.
“We believe that the cut in RRR is not just a structural change in the banking system, but an indication of the BSP’s bias for growth,” he said.
“Cutting RRR would reduce intermediation costs of bank—a plus for loans and the economy but a partial siphoning off the added liquidity would make sense initially in supporting growth, as the incremental liquidity finds its way to government deficit spending or bank loans,” the economist added.
True enough, the Bankers Association of the Philippines (BAP) issued a statement after the cut, saying that the RRR cut will enable borrowers to have “access to more sources of funds and more efficient cost of borrowing that is expected to propel more economic activity in the country.”
“In a few weeks, we expect that BAP member-banks will be able to extend additional credit to consumers and enterprises that require adequate funds for their personal and business needs,” BAP Managing Director Benjamin Castillo said in a statement.
Cuyegkeng said market perceives further cuts in RRR not only this year but for the rest of the term of the BSP governor, as the governor wants to bring RRR to 10 percent or less in the next five to six years.
Central Bank Governor Nestor A. Espenilla Jr. earlier signaled more moves to reduce the RRR, as he vowed to “gradually lessen its reliance on reserve requirements for managing liquidity in the financial system.”