MONEY SUPPLY growth picked up in September as demand for credit inched up and following the recent cut in banks’ reserve requirement ratios (RRR).

Domestic liquidity or M3, the broadest measure of money supply in an economy, grew 7.7% year-on-year to P12 trillion, a faster pace than the upward-revised 6.3% growth seen in August, preliminary central bank data released yesterday showed. Month-on-month, money supply rose by 1.5%

“Demand for credit remained the principal driver of money supply growth,” the Bangko Sentral ng Pilipinas (BSP) said in a statement.

Net claims on the central government rose six percent year-on-year, picking up from the upward-revised 2.4% pace in August. Meanwhile, domestic claims, which were mainly supported by the private sector, rose 7.4%, slower than the upward-revised 7.8% seen in August.

The central bank said loans for production activities continued to be driven by lending to key sectors such as real estate activities; financial and insurance activities; construction; electricity, gas, steam and air conditioning supply; and wholesale and retail trade, repair of motor vehicles and motorcycles.

Meanwhile, net foreign assets (NFA) in peso terms climbed 8.3% in September from the 8.9% print logged in August. The BSP said this was supported by foreign exchange inflows coming mainly from overseas Filipinos’ remittances and business process outsourcing receipts.

On the other hand, NFA held by banks slipped by 3.2% year-on-year in September from a growth of 17.9% in the preceding month.

“The NFA of banks decreased as their foreign liabilities rose due to increased placements and deposits made by foreign banks with their local branches and other banks,” the BSP said.

Analysts said the increase in liquidity was partly driven by the RRR cuts implemented by the central bank during the period.

The BSP in May announced a phased 200-basis-point (bp) cut in the RRR of universal, commercial banks and thrift banks. This brought the reserve ratio of big banks to 16% effective July 26, while the RRR of thrift lenders was cut to 6%.

The central bank has since announced more reductions in banks’ reserve requirements.

In a statement last week, the BSP said its policy-setting Monetary Board (MB) decided to slash the RRR of universal, commercial and thrift banks by another 100 bps effective December, bringing total reductions to their reserve ratios for this year to 400 bps.

The MB said the cut will also apply to the reserve ratio of non-bank financial institutions with quasi-banking functions (NBQBs).

This latest cut will follow the 100-bp reduction in all banks’ RRR announced on Sept. 27 which takes effect next month and will bring the reserve ratio of universal and commercial lenders to 14% by December, while the RRR of thrift banks will stand at four percent.

Meanwhile, the reserve ratio of rural banks, which will go down to three percent next month, was untouched.

On the other hand, the reserve ratio of NBQBs will be cut to 14% by December.

“The growth rates were observed after the period of the phased 200 bps reserve requirement ratio cut from May to July 2019 as extra liquidity slowly found its way into the financial system. The cuts have released approximately P200 billion into the system, and was expected in part to enable the private sector to help finance the infrastructure program by the government via loans,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a note sent to reporters.

Despite the boost in liquidity, bank lending growth was flat in September amid steady production loans, the BSP reported separately on Thursday.

Outstanding loans of universal and commercial banks grew 10.5% year-on-year in September, steady from the August print. Inclusive of reverse repurchase agreements, bank lending rose 10.2% in September, slightly picking up from the 10% seen the previous month.

Production loans comprised 87.4% or the bulk of banks’ total lending, growing nine percent in September, also flat from the previous month.

Construction loans continued to see the highest expansion at 36.2%, followed by credit for real estate activities at 18.3%; finance and insurance activities at 17.6%; electricity, gas, steam and air conditioning supply at 9.2%; and wholesale and retail trade, repair of motor vehicles and motorcycles at 4.8%.

Lending to other sectors also picked up in September, except credit for other community, social and personal activities which plummeted 39.8%, and the professional, scientific and technical activities, which fell 35.7%.

Meanwhile, loans for household consumption climbed 26.2% in September, picking up from the 25.4% growth in August, fuelled by the faster growth in motor vehicle, credit card, and salary-based general purpose consumption loans.

“Analysts are pointing out to the reluctance on the part of corporates to take on hefty loans as they wait for rates to hit rock bottom,” ING Bank N.V.-Manila Branch Senior Economist Nicholas Antonio T. Mapa said in an email.

“They also cite the dovish Governor [Benjamin E. Diokno] and expectations for further rate cuts for the hesitation and thus we may not see bank lending pick up regardless of additional RRR reductions as CFOs (chief financial officers) await possible further rate cuts from the BSP,” he added.

Meanwhile, Security Bank’s Mr. Roces said the current bank lending growth pace is still “reasonable in the interim”.

“The third policy rate cut of 25 bps was announced by the BSP at the end of September during its regular policy meeting, with a possible pause to the cuts telegraphed by the central bank the following day,” Mr. Roces said.

“The uncertainty of further policy cuts until then may have caused borrowers to hold off taking out loans. Second, money supply growth, in theory, should precede loan growth due to a lag in liquidity absorption,” he added.

“We expect both loan growth and liquidity levels to accelerate towards year-end as government ramps up spending, with a pause in monetary easing communicated by the central bank,” Mr. Roces said. — Luz Wendy T. Noble