Japan’s Nomura Global Markets Research anticipates that the Bangko Sentral ng Pilipinas (BSP) will embark on an easing cycle in the coming year by implementing key policy rate cuts totaling 125 basis points (bps).
In their report titled “Philippines: Two Sides of the Same Coin,” Nomura ASEAN economist Euben Paracuelles and analyst Rangga Cipta assert that the central bank’s Monetary Board will commence reducing interest rates next year following a cautious pause in the current year.
Having previously increased rates by a cumulative 425 basis points during a year-long tightening cycle that began in May last year to control inflation and stabilize the peso, the BSP decided to exercise caution by maintaining rates on May 18.
This decisive tightening resulted in the overnight reverse repurchase rate surging to a 16-year high of 6.25 percent from an all-time low of two percent during the peak of the COVID-19 pandemic.
Paracuelles and Cipta suggest that the BSP will likely emulate the US Federal Reserve’s approach to maintain a robust interest rate differential of at least 100 basis points.
According to their analysis, the pause signifies the conclusion of the BSP’s hiking cycle, with a projection that headline inflation will return to the BSP’s targeted range of two to four percent by September.
They further anticipate that the BSP will only begin reducing its policy rate in March 2024, aligning with the projected easing by the US Federal Reserve.
Their forecast indicates a total of 125 bps in rate cuts.
Nomura has revised its inflation forecast, predicting a decrease from 5.8 percent to 5.3 percent for the current year, followed by a further decline to 3.1 percent next year, in line with the downward trend in inflation.
Despite inflation averaging 7.5 percent in the initial five months of the year, well above the BSP’s target range of two to four percent, there was a marginal easing to a 12-month low of 6.1 percent in May, down from 6.6 percent in April.
However, Nomura points out that core inflation remained relatively stable, experiencing a slight decrease from 7.9 percent to 7.7 percent.
The Japanese bank also highlights the BSP Monetary Board’s decision to reduce major banks’ reserve requirement ratio (RRR) to single-digit levels by the end of this month.
As promised, the regulator has significantly lowered the RRR for universal and commercial banks, as well as non-bank financial institutions with quasi-banking functions (NBQBs), by 250 bps to 9.5 percent from the current level of 12 percent.
Similarly, digital banks have experienced a reduction of 200 bps in their RRR, bringing it down from eight percent to six percent.
Furthermore, the mandatory deposit level for mid-sized or thrift banks supervised by the BSP has decreased by 100 bps, now at two percent instead of three percent.
Additionally, the RRR for small banks, including rural and cooperative banks, has been reduced by 100 bps to one percent from two percent.
This adjustment in reserve ratios has been timed to coincide with the expiration of alternative compliance methods for reserve requirements related to loans provided to micro, small, and medium enterprises (MSMEs) by the end of June this year, ensuring the stability of domestic liquidity and credit conditions.
Paracuelles and Cipta explain, in line with the BSP’s earlier communication, that the RRR cut aims to counteract the impact of the expiration of a pandemic rule, which allowed banks to utilize SME loans for RRR compliance, thus maintaining a neutral liquidity impact.
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