Liquidity, bank lending down in August as BSP policy tightening takes hold

Bank lending and money supply growth—both indicators of inflationary cash in the local financial system—eased in August, raising hopes the central bank’s efforts to rein in consumer prices may be starting to work.

In a press statement, the Bangko Sentral ng Pilipinas (BSP) said the outstanding loans of commercial banks grew at a lower rate of 18.9 percent in August from 19.6 percent in July.

Including banks’ short-term deposits with the central bank, the growth in bank lending also slowed down to 18.4 percent in August from 18.7 percent in the previous month. On a month-on-month seasonally adjusted basis, commercial bank loans net and inclusive of these deposits increased by 1.2 percent and 0.6 percent, respectively.

The central bank has been tightening monetary policy in response to rising inflation, which has been on an uptrend since January. It hiked interest rates by 25 basis points in May and again in June, followed by a 50-basis point hike in August, then again this week. All told, regulators have raised rates by 150 basis points this year, thus draining billions of inflationary idle cash from circulation.

Loans for production activities—which comprised 88.6 percent of banks’ aggregate loan portfolio, net of central bank placements—expanded at a slightly lower rate of 19.1 percent in August from 19.7 percent in the previous month.

The growth in production loans was driven primarily by increased lending to the following sectors: wholesale and retail trade, repair of motor vehicles and motorcycles (24.5 percent); financial and insurance activities (37.2 percent); real estate activities (15.6 percent); manufacturing (19.9 percent); electricity, gas, steam and airconditioning supply (12.0 percent); and, construction (36.9 percent). Bank lending to other sectors also increased during the month except in agriculture, forestry and fishing (-25.2 percent).

Similarly, the growth of loans for household consumption decelerated to 15.8 percent in August from 16.9 percent in the previous month due to the slower expansion in credit card loans and motor vehicle loans, as well as the decline in salary-based general purpose consumption loans and other types of household loans during the month.

Preliminary data also showed domestic liquidity grew by 10.4 percent year-on-year to about P11.2 trillion in August 2018, slower than the 11-percent expansion in the previous month. On a month-on-month seasonally adjusted basis, M3 increased by 1 percent.

Domestic claims grew by 15 percent in August, slower than the 16.1-percent growth in the previous month owing to the slower growth in credit to the private sector. Loans for production activities continued to be driven by lending to key sectors such as wholesale and retail trade, repair of motor vehicles and motorcycles; financial and insurance activities; real estate activities; manufacturing; electricity, gas, steam and airconditioning supply; and construction.

“The overall pace of growth in money supply remains in line with the BSP’s outlook for inflation and economic activity,” the central bank said in a statement. “The BSP will continue to closely monitor domestic liquidity dynamics to ensure that monetary conditions remain conducive to price and financial stability.”