Angelo Taningco
Economist,Treasury Group

Domestic liquidity and bank lending both rose at a faster pace in July, with the growth of the former climbing to 13.5% year-on-year (yoy) from 13.3% yoy in June and that of the latter increasing to 19.7% yoy from 19.0% yoy in the same period, according to data from the Bangko Sentral ng Pilipinas (BSP) released on 31 August (Figure 1).

Figure 1: Domestic Liquidity & Bank Lending

Jul. 2015 – Jul. 2017
(yoy %)

Stronger domestic liquidity growth was supported by a more robust loan demand by the private sector, with domestic claims growth rising to 15.7% yoy in July from 15.4% yoy in June. Outstanding loans by universal and commercial banks grew at a quicker rate in July on the back of faster growth in loans for production, specifically in manufacturing, real estate, utilities, and wholesale and retail trade: bank loans for production, which accounts for almost 90% of total loans, grew 18.9% yoy in July compared with 17.9% yoy in June. Meanwhile, bank loans for consumption expanded 22.3% yoy in July, albeit at a slower rate than its 22.5% yoy growth in June on loan growth moderation in credit cards and motor vehicles.

Economic theory postulates a positive long-run relationship between money supply and consumer prices. This is known as the quantity theory of money. Along this line, money supply growth is positively linked to consumer price inflation. Despite faster domestic liquidity or money supply growth, we still see inflationary pressures to remain manageable in the near term. We establish a statistically significant and positive relationship between domestic liquidity (M3 money supply) growth and headline consumer price index (CPI) inflation, but the correlation coefficient is moderately low at 0.40 (Figure 2). Moreover, our model suggests that a one percentage point increase in the domestic liquidity growth rate will raise the headline CPI inflation rate by only 0.05 percentage points. Meanwhile, for the month of August, we forecast headline CPI inflation to level off at 3.0% yoy, with upward price pressures to arise from food price inflation, higher cost of transport services, and hikes in electricity rates and fuel prices.

Figure 2: Domestic Liquidity Growth & Consumer Price Inflation
(yoy %)

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