Coming soon: monetary easing

PHILIPPINES - In Brief 12 Mar 2019 by Romeo Bernardo

In a one-on-one interview with the country’s best-known business journalist on television, the new BSP Governor Benjamin Diokno noted that falling local inflation plus the more dovish stance of developed economies’ central banks provide room for monetary easing, especially following last year’s 175bp cumulative interest rate hike. However, he declined to say whether or not interest rate cuts are in store this year. Instead, what he said was that monetary easing will be done through cuts in the reserve requirement ratio (RRR) on bank deposits. Depending on data, he said that “it could be 1ppt every quarter for the next four quarters,” with each ppt reduction freeing up P90-P100 billion of domestic liquidity. He did not say how low he wanted the RRR to go. Former Governor Nestor Espenilla, Jr. wanted to lower the RRR, currently at 18% for commercial banks, to single digit level; but he managed to cut only 200bp last year following rising inflation and inflation expectations.We think cutting the RRR, supposed to lower banks’ intermediation cost and thus lending rates, would in the short-term mainly be positive for banks’ incomes. It would not have the same immediate impact on market rates as a reduction in the policy rate and thus, growth impacts would be much less visible given current global and local economic and political uncertainties that discourage risk taking.

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