Bank lending softens in January as rate hikes take effect

MANILA, Philippines — Credit growth softened in January, as the impact of the Bangko Sentral ng Pilipinas’ aggressive interest rate hikes to tame consumer demand fueling painfully-high inflation seeped into the economy. 

Excluding lending among each other, outstanding loans of universal and commercial banks rose 10.4% year-on-year in January. This was slower than the 13.4% outturn recorded in the previous month, the central bank reported on Tuesday. 

Data showed this was the 18th straight month of loan growth despite the BSP’s aggressive interest rate actions. Month-on-month, credit stayed flat. 

At the same time, more money circulated in the domestic economy during the month. A separate BSP report also released on Tuesday showed M3, the broadest measure of money supply, fattened 5.5% year-on-year in January to P16 trillion.

Sought for comment, Domini Velasquez, chief economist at China Banking Corp., noted that the latest figures still showed signs of growth but she offered some caveats.

“The continued double-digit growth still pointed to robust demand and was likely supported by positive sentiments on the economy’s growth prospects. However, we may see loan growth further soften as the economy is expected to feel the full impact of the BSP’s rate hikes this year,” she said in a Viber message.

Interest rate adjustments typically take 12 to 18 months before the domestic economy feels the effects. This was the case in 2021, which saw bank lending snap a losing streak once BSP slashed interest rates to 2% in November 2020.

Data broken down showed loans to businesses jumped 9.2% on-year in January, albeit lower compared to the revised 12.4% growth in the previous month. Double-digit increases in credit growth were seen in electricity, gas, steam and airconditioning supply, wholesale and retail trade, repair of motor vehicles and motorcycles,  manufacturing, and information and communication. 

Nicholas Antonio Mapa, senior economist at ING Bank in Manila, agreed with Velasquez’s assessment. The ING economist made the case for BSP’s aggressive interest rate hikes shaping economic activity.

“Aggressive monetary tightening weighing on bank lending with loans to productive sector in single digit expansion now,” he said in a Viber message.

“This shows that rate hikes do work in snuffing out growth momentum and we can expect bank lending to slow further in the coming months as the full effect of the monetary rate hikes surface,” Mapa added.