LENDERS’ reluctance to lend and borrowers’ unwillingness to borrow is dampening the effectiveness of the Bangko Sentral ng Pilipinas’s (BSP) massive monetary policy easing, thereby weakening its ability to prop up growth in the midst of a global health and economic crisis.
In a press briefing on Thursday, BSP Governor Benjamin Diokno said recent data shows that their massive drive to cut rates is still not pushing banks and lenders to increase their lending and borrowing activity.
“Weak market confidence continues to dampen the transmission from accommodative financing conditions to credit activity and private spending,” Diokno said.
“Even as monetary policy actions typically work with a lag, the latest data on domestic liquidity and bank lending indicate that credit activity has remained tepid as banks remain generally cautious, while households and businesses remain reluctant to borrow,” he added.
Theoretically, central banks use interest rate cuts to boost the economy as the lower interest rates translate to the market as lower financing costs, thereby creating an encouraging environment for borrowing and investment.
BSP has aggressively cut its interest rates for the year to support the economy. In total, the Central Bank has already cut its rates by 200 basis points—25 basis points in February, 50 basis points in March, another 50 basis points in an off-schedule Monetary Board meeting in April, another 50-basis-point cut in June and the latest 25-basis-point cut just last month.
No pickup
However, latest data on bank lending and domestic liquidity shows no pick up in activity.
Domestic liquidity—broadly measured as “M3”—grew slower at 12.3 percent to P13.5 trillion in September. This is tamer than the 13.7-percent growth seen in the previous month.
Bank lending—one of the primary drivers of domestic liquidity — grew at 2.8 percent in September, also weaker than the 4.7-percent growth in August.
As such, the BSP governor cited the importance of other government initiatives—particularly on the fiscal side—to support the monetary policy cuts in helping the economy recover.
“While the BSP continues to have ample monetary space to help ward off emerging downside risks to growth amid a benign inflation environment, it recognizes that sustained and targeted fiscal interventions at this juncture are also crucial in reviving domestic demand,” Diokno said.
“Improvements in market sentiment shall then help the BSP’s monetary policy actions gain further traction in driving credit and economic activity,” he added.