Low bank lending data dims rate hike option
THE two-month contraction in the country’s bank lending numbers is likely to kill any hopes of a rate hike to curb inflation in the near future, a private economist said.
In his recent analysis after the Bangko Sentral ng Pilipinas (BSP) reported the January credit contraction, ING Bank economist Nicholas Mapa said with low capital formation and bank lending in the red, the prospect of tightening monetary policy will “likely be low on the list of priorities at the Central Bank.”
Mapa said, “A rate hike at this stage will all but ensure that bank lending stays in contraction and for a much longer time as any signal from BSP that monetary support is on its way out of town would usher in financial market panic last seen in 2018.”
Data from the BSP released Tuesday afternoon showed bank lending contracted by 2.4 percent in January.
January was the tenth consecutive month that bank lending has slowed despite BSP’S aggressive efforts to lower interest rates and boost liquidity conditions. In comparison, the Philippines’s bank lending growth rate was at 13.6 percent in March 2020.
Bank lending first collapsed
into contraction territory in December by 0.7 percent. This was the system’s first lending decline in 14 years.
“Thus, despite the recent surge in consumer prices, BSP will hold off on the urge to hike policy rates in the near term and provide the economy much-needed support for as long as it can, knowing fully well that this inflation episode will fade once supply-side bottlenecks are addressed,” Mapa said.
The economist said the contraction in bank lending can be traced to weaker demand for loans as households and firms are likely putting off investment plans for now.
“Banks may have also turned averse to doling out funds given the increased level of risk in the market given the recession,” Mapa said.
The economist expects bank lending to remain in contraction territory for the next couple of months, with bad loans also likely edging higher as the recession takes root.
The BSP’S next monetary policy meeting is on March 25. This will be the second monetary policy meeting of the BSP for this year.
Following their announcement of another contraction in bank lending, BSP Governor Benjamin Diokno reiterated the BSP’S readiness to deploy “appropriate measures” as needed in support of the recovery of the economy, consistent with its price and financial stability mandate.