Local banks responding more to policy decisions

MONETARY POLICY in the Philippines could have a greater influence on the credit channels of domestic lenders amid increasing competition from foreign bank branches, the Bangko Sentral ng Pilipinas (BSP) Research Academy said.

In a discussion paper written by Laura BrittFermo and Neil Fidelle G. Lomibao, the BSP said changes in central bank regulation and bank market structures have policy implications.

“With bank concentration increasing over time, and with the onset of increased entry and competition from foreign bank branches and affiliates, our results suggest that monetary policy could have more power through the credit channel particularly via domestic banks in the future,” it said.

“It is therefore important that the monetary authority is well informed on how best to tap this influence via bank credit and lending rates in the transmission channel,” according to the paper.

BSP has been the most aggressive central bank in the region after hiking benchmark interest rates by 450 basis points (bps) since May 2022 to tame inflation and stabilize the peso.

The Monetary Board hiked borrowing costs by 350 bps in 2022, before delivering another 100 bps last year. This brought the target reverse repurchase (RRP) rate to 6.5%, the highest in 16 years.

Bank lending slowed for the most part of 2023 due to the BSP’s rate increases. Latest central bank data showed outstanding loans by big banks rose by 7% to P11.701 trillion at end-December, which was unchanged from November and the slowest in three months.