Bangko Sentral ng Pilipinas Governor Felipe Medalla said Thursday the reserve requirement of banks may be reduced from 12 percent in the first semester this year especially if there is no longer a pressure to increase the interest rates.
Medalla said, however, the BSP would not want to confuse the financial markets.
“It is hard to be raising [the] policy rates and cutting reserve requirements. Although we should be able to do that, because we can offset the cut in RRR by increasing our borrowing [rate]. But given the situation, the last thing we want to do is confuse the signals,” Medalla said in an interview over ANC’s Market Edge.
“So when we are no longer under pressure to raise policy rates, then we will cut RRR because we don’t think it is healthy to have a 12-percent RRR,” he said.
Reserve requirements are the minimum reserves required for depository institutions. They are set by the central bank within limits specified by law. A change in the minimum reserve ratio affects the amount of its deposit base a financial institution can lend out.
“Not only that, we also had a temporary relief measure for SMEs. [And banks] making loans to SMEs [small and medium enterprises] qualify as a fulfillment of reserve requirements. That is going to end, so we have to replace that with a permanent measure which is a cut in the RRR,” Medalla said.
“I think the likelihood it will happen in the first semester is quite high,” Medalla said.
The BSP cut the reserve requirement ratios of universal and commercial banks by 200 basis points to 12 percent on March 24, 2020 to boost domestic liquidity amid the onslaught of COVID-19 that threatened economic growth.
Medalla also said the worst was over for inflation, and he expected it to be within the target range of 2 percent to 4 percent by the third quarter of 2023 after accelerating to a more than 14-year high of 8.1 percent in December 2022.
“I think the worst is over… Because we got hit by high oil prices. Finally the oil price shocks are fading. Then we got hit by high sugar prices…We got hit by [higher prices of] food and vegetables, name it. And then the fertilizer shortage, that resulted in higher food prices,” he said.
“We thought that the last bad months would be October and November, but we had another shock. But finally the December print, although the year on year is quite high, the month on month is back to normal,” he said.
The Monetary Board on Dec. 15, 2022 raised the benchmark interest rate by 50 basis points to a more than 14-year high of 5.5 percent to prevent the second-round effects of inflation and defend the peso against the US dollar.
The last time the policy rate hit 5.5 percent was in December 2008 during the global financial crisis. In November 2008, the policy rate reached 6 percent.
Medalla said he was expecting the gross domestic product this year to grow beyond 6 percent, driven by robust consumer spending.
“Our base scenario is GDP growth above 6 percent because there is still quite a bit of pent-up demand. For instance, a lot of people have yet to go back to Boracay… or Palawan… And people who postponed buying major items,” he said.
He said the people’s willingness to spend could be seen, for instance, in the case of the latest car sales data which expanded by double-digits last year.
“Expenditures that were postponed for the past 2.5 years [during the pandemic], those are not fully back yet. So this year, we still have some of that pent-up demand,” he said.