Angelo Taningco
Economist, Treasury Group

Domestic liquidity and bank loans both grew at a faster pace in June, depicting ample liquidity and vibrant bank lending activity: M3 money supply growth accelerated to 13.2% year-on-year (yoy) in June from 11.3% yoy in May while commercial bank loans outstanding (net of reverse repurchase placements) expanded 19.0% yoy in June versus 18.7% yoy in May, according to the Bangko Sentral ng Pilipinas (BSP) latest liquidity and bank lending figures released on 31 July (Figure).

Figure: Growth in Domestic Liquidity and in Commercial Bank Lending, Jan. 2015 – Jun. 2017 (yoy %)

 
Growth in domestic claims stood at 15.4% yoy in June, up from its 14.3% yoy in May, and was largely responsible for the stronger domestic liquidity expansion during the month. In addition, the robust commercial bank loan growth in June was induced by relatively strong expansion in loans for productive activities (17.9% yoy) and for household consumption (22.5% yoy).

We think the double-digit growth in both domestic liquidity and commercial bank lending not just in June but also for the second quarter reinforces our expectation of real economic activity likely to have expanded by 6.5% yoy in the said quarter. We continue to believe that such liquidity and bank lending trends running at double-digit growth will continue for the remainder of the year, and will therefore lead the domestic economy to continue growing by above 6% for the subsequent quarters of the year.

Notably, we do not expect inflation to rise sharply in the near term as a result of the growth uptick arising from both domestic liquidity and commercial bank loans in June. This is because we suspect there is weak positive correlation between domestic liquidity growth or bank lending growth and consumer price inflation, partly due to the central bank’s inflation targeting approach. Along this line, we do not think the BSP’s Monetary Board will make any adjustment on its key interest rates during its next meeting on 10 August.

However, given that both domestic liquidity and bank loans have remained ample with growth being buoyant for both, this appears to suggest that injecting additional liquidity into the financial system via a cut in the reserve requirement ratio may not be warranted at this juncture. Such non-action to increase liquidity via a cut in the reserve requirement ratio may help avoid stronger inflationary pressures, especially knowing that the average H1 2017 headline and core inflation rates are 3.1% and 2.8% yoy, respectively, already close to the midpoint of the BSP’s inflation target of 3% ± 1 percentage point. With this, we think the BSP’s Monetary Board will not alter the reserve requirement ratio in its upcoming meeting.

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