Bank lending growth expected to slow down

Growth in bank lending, which posted a two-year high in July, is expected to slow down in the remainder of the year as the impact of the interest rate hikes and higher reserve requirement kicks in.

This was according to First Metro Investments Corp. (FMIC) and University of Asia and the Pacific (UA&P), which said in their monthly publication that higher interest rates could “dampen a bit” the market’s appetite for loans. This is seen to result in the slowing of credit growth.

“Despite a blip in credit expansion and, correspondingly, a slight acceleration in money supply growth, we do not see this to be sustainable given current policy rates at 4.5 percent and reserve requirement at 21 percent,” FMIC and UA&P said in the latest issue of the “Market Call.”

The central bank earlier reported that outstanding loans extended by universal and commercial banks reached P2.57 trillion as of end-July, rising by 19.1 percent from P2.16 trillion a year ago.

The growth in bank lending during the period was the fastest registered since April 2009.

According to the Bangko Sentral ng Pilipinas, the rise in bank lending was due to the growing liquidity of the banking sector, improving appetite of banks to lend, and the considerable demand for loans from consumers and enterprises.

FMIC and UA&P said, however, that the impact of recent moves of the BSP to temper the growth in lending would likely be felt toward the end of the year. They said credit growth could slightly decelerate as a result of higher interest rates and reserve requirement.

In March and May this year, the BSP had raised its key policy rates, which influenced commercial interest rates, by a total of 50 basis points. The overnight borrowing rate thus now stands at 4.5 percent.

The BSP also raised in June and July its reserve requirement on banks by a total of 2 percentage points to 21 percent. The reserve requirement is the proportion of deposits that banks must keep with the BSP as reserves.

The moves of the BSP were meant to temper the increase in consumer prices, which were feared to rise faster than targeted if no monetary action was done.

Higher interest rates dampen demand for loans, and should slow down consumption and inflation. Higher reserve requirement tempers the growth in the amount of money that banks may use for lending.

Inflation averaged 4.3 percent in the first eight months of the year, which was well within the full-year average target of 3 to 5 percent. Inflation could have gone beyond 5 percent this year if the BSP did not touch the policy rates and the reserve requirement, central bank officials earlier said.