BSP is unlikely to raise rates and lower RRR anytime soon

BANGKO SENTRAL ng Pilipinas is likely to keep interest rates and bank reserve requirements stable in the interim. – NB FILE PHOTO

THE CENTRAL BANK will not be raising rates or reducing the reserve requirement ratio (RRR) of banks anytime soon, as the economy’s recovery is only in its “early stages,” the governor said on Monday by Bangko Sentral ng Pilipinas (BSP), Benjamin E. Diokno.

Mr Diokno said on Thursday ahead of the Monetary Council’s policy review that now was not the right time to adjust benchmark interest rates or lender reserve rates as the economy still needs the support for an accommodative policy.

“We have to maintain it [economic recovery] and raising interest rates right now is not the right thing to do, it’s counterproductive, ”he said in an interview with ABS-CBN News Channel on Monday.

“We will continue to accommodate monetary policy for as long as necessary to ensure that the economic recovery is sustainable and strong,” Diokno added.

Banks’ RRR cut “not on the agenda” for Thursday’s policy meeting, he added, following indications from the central bank last week that it remains open to cut of these ratios.

“While I pledge to reduce the RRR to single digits before the end of my term, which is in 2023, reducing it now is inappropriate and unwarranted,” Diokno said.

“There is still a lot of liquidity in the system. If there comes a time when the financial system needs more liquidity or some kind of high demand for loans, then this is the time when we might consider… ”he added.

A Business world A poll last week showed 18 analysts unanimously expect the BSP to keep benchmark interest rates unchanged at their all-time lows at Thursday’s meeting as the variant spread Coronavirus disease 2019 (COVID-19) delta threatens the economic outlook.

The BSP cut benchmarks by 200 basis points (bps) cumulatively last year. Borrowing costs have reached record levels since the last Monetary Board adjustment, which was down 25bp in November.

In addition to keeping rates low, the central bank also provided stimulus by releasing liquidity through RRR cuts and other easing measures, which released some 2 trillion P2 into the financial system, which is equivalent to around 12% of the country’s gross domestic product (GDP). .

Despite this, bank credit has been contracting since December, falling 2% in June due to the cautious lenders in an uncertain economic environment.

Reserve requirements for major banks are currently 12%, still one of the highest in the region. The central bank last cut the RRR of the big banks in April 2020 with a 200bp cut.

In July 2020, it also reduced the reserve requirements of savings banks and rural banks by 100 basis points to 3% and 2%, respectively.

ING Bank NV Manila Senior Economist Nicholas Antonio T. Mapa said that due to excess liquidity in the financial system, funds that will be freed up by another reduction in RRR are unlikely to flow. find in the real economy.

“An additional 100 billion pesos freed up by a potential reduction in the RRR would simply flow back to the BSP’s overnight facilities and likely not be used to fund new loans,” Mapa said.

He noted that most of the liquidity released through the central bank’s easing measures is “simply returned” to the BSP – parked in its term deposit facility and short-term securities – as banks are reluctant to lend in advance. due to the risky business environment.

“The BSP has done its part to signal to banks and realign the risk-reward spectrum that banks need to consider, but ultimately it will be up to the banks to deploy these funds in the productive sectors of society,” Mr Mapa said. added.

The economy contracted 3.9% in the first quarter, a smaller contraction from the 4.2% previously reported, based on revised data released Monday by the Statistics Authority of the Philippines (PSA).

The PSA will release second quarter GDP data on Tuesday. A separate Business world A poll of 20 analysts gave a median estimate of 10.6% growth for the April to June period, mainly due to the base effects of the 17% contraction a year earlier. If this happens, it would mark the country’s exit from recession after five consecutive quarters of economic contraction.

The government is targeting 6-7% GDP growth this year. – LWTN

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