MONEY SUPPLY growth in December accelerated with the financial system continuing to feel the impact of the easing stance taken by the central bank in 2019.

Domestic liquidity or M3, the broadest measure of money supply, expanded by 11.4% year-on-year to P13 trillion in December, picking up from the 9.8% pace in November, according to preliminary data from the Bangko Sentral ng Pilipinas (BSP) released Wednesday.

Month-on-month, M3 grew 1.6%.

“Demand for credit remained the principal driver of money supply growth,” BSP Governor Benjamin E. Diokno said in a statement.

Analysts attributed the acceleration in liquidity growth to the rate cuts as well as the reserve requirement ratio (RRR) reductions ordered by the central bank.

“System liquidity is improving on the back of the RRR cuts, albeit with a lag, as it took time for the financial system to absorb improving money supply.” Security Bank Corp. Chief Economist Robert Dan J. Roces said in an e-mail.

Mr. Diokno has previously said that RRR reductions may take about nine months before it could fully be felt by the market. With this, he said that monetary policy should be forward-looking.

Meanwhile, Union Bank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion also attributed the expansionary stance of the BSP as the main driver of liquidity growth.

“For the policy rate meeting tomorrow, these numbers will be taken into consideration, but, as the (BSP) Governor Diokno mentioned, both global oil prices and the impact of the nCoV outbreak will play a significant part in the decision to be made by the Monetary Board. Both of these factors point to a cut of 25 basis points (bps) this Thursday,” he said in an e-mail.

Current key policy rates stand at 4% for overnight reverse repurchase, while overnight deposit and lending are at 3.5% and 4.5%, respectively. These settings were arrived at after 75-bps worth of rate cuts in 2019, which partially dialled back the 175-bps worth of rate hikes in 2018 amid high inflation.

Mr. Diokno said last week that monetary authorities are still looking into reducing rates by around 50 bps this year, with a 25-bps cut coming as early as the first quarter if conditions warrant.

After Thursday, the Monetary Board (MB) will also meet on March 19, before the first quarter ends.

The RRR was reduced by 400 bps last year, bringing the reserve requirement for big banks to 14%.

The MB also reduced RRR for non-bank financial institutions with quasi-banking functions to 14%.

According to BSP data, net claims on the central government grew by 24.4% year-on-year in December, quicker than the 13.9% print in November.

Meanwhile, domestic claims, which were mainly supported by the private sector, rose 10.5%, a pickup from the 8.3% logged in November.

“Loans for production activities continued to be driven by lending to key sectors such as real estate activities; financial and insurance activities; electricity, gas, steam and air conditioning supply; construction; and information and communication,” Mr. Diokno said.

Meanwhile, net foreign assets (NFA) in peso terms rose 8.8% in December after expanding 11.5% a month earlier.

On the other hand, NFAs held by lenders grew 21.8% after rising 18.3% in November.

Bank lending growth also accelerated for the second consecutive month in December, the central bank said.

Outstanding loans by universal and commercial banks rose 10.9% in December from the 10.1% in November. Inclusive of reverse repurchase agreements, bank lending rose 10.9%, up from the 10.2% recorded in the preceding month.

Production loans drove bank loan portfolio growth, accounting for 87.4% of the total. They rose 9.1% in December after rising 8.1% in November.

Loans disbursed for construction activities grew 23.4%, followed by real estate activities (19.7%), financial and insurance activities (17.2%); information and communication (12.9%), and electricity, gas, steam and air conditioning supply (8.3%).

According to BSP data, credit to other sectors also picked up in December, except community, social and personal activities (-21.7%); mining and quarrying (-11%); scientific and technical activities (-4.6%), and manufacturing (-1.9%).

Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said: “This means the RRR cuts of the BSP over the last two years are working. Banks are lending at double-digit growth rates,” Mr. Neri said in a text message.

“An important implication is that the BSP should consider doing more in 2020. It can take the opportunity to align our RRR with regional standards while inflation is still below the policy rate,” he added.

Mr. Diokno has promised to reduce the RRR for banks to single-digit levels by the end of his term in mid-2023.

The Philippine Statistics Authority reported that inflation picked up to 2.9% in January from 2.5% in December mainly due to an uptick in food prices. Despite this, inflation in the previous month was still well-within the central bank’s target range of 2-4%.

ING Bank-NV Manila Senior Economist Nicholas Antonio T. Mapa said that a continued expansionary stance from the BSP could help to spur “investment momentum.”

“The tandem of policy rate cuts and RRR reductions will go a long way to restoring lost investment momentum and we expect further cuts to the policy rate and RRR in 2020,” he said in an e-mail. — Luz Wendy T. Noble