RATE CUTS do not necessarily boost credit activity even as monetary policy is seen to influence bank lending, a study by researchers from the Bangko Sentral ng Pilipinas (BSP) showed.
“Central banks can ‘pull’ back economic activity by raising interest rates, but they cannot ‘push’ it forward simply by lowering rates,” BSP researchers said in a recent discussion paper.
The paper, authored by BSP Research Academy Principal Researcher Carolina A. Escranda and BSP Department of Economic Research Bank Officer Bernadette Marie M. Bondoc-Quiban, discussed the impact of monetary policy on bank lending.
“We found that monetary policy affects the lending activity of universal and commercial banks in the Philippines. However, the impact is asymmetric, with evidence of transmission during restrictive periods but not during accommodative ones,” the BSP researchers said.
“During restrictive periods, higher interest rates increase borrowing costs, reducing loan demand and tightening credit supply. Conversely, during accommodative periods, lower interest rates may not suffice to boost lending.”
The BSP began its easing cycle in August last year. It had slashed borrowing costs by a total of 75 basis points (bps) to 5.75% by end-2024.
From mid-2022 to late 2023, the BSP was the most aggressive central bank in the region as it hiked key rates by 450 bps to tame inflation, which soared to as high as 8.7% in January 2023.
The Monetary Board is set to hold its first rate-setting meeting of the year on Feb. 13. The BSP has signaled further easing, though in “baby steps.”
“Banks may be reluctant to lend due to heightened perceptions of borrower risk or diminished profitability. Borrowers may also be unwilling to take on new debt amid economic uncertainty,” according to the BSP researchers.
Separate data from the BSP showed outstanding loans of big banks jumped by 11.1% to P12.68 trillion in November, the fastest in close to two years.
The BSP researchers noted that when central banks raise interest rates, market rates increase, as banks pass these on to borrowers, citing another study.
“While that is true in most cases, banks may limit their interest rate hikes to avoid defaults. Instead, they may ration credit during high-interest rate periods, lending only to certain borrowers.”
“This credit rationing can lead to a bigger decline in output, magnifying the impact of contractionary monetary policy. However, this is not the case for expansionary monetary policy.”
Lower policy rates do not necessarily boost borrowing “if there is no demand for additional credit given economic conditions,” they added.
“The central bank’s tightening policy impacts credit supply in smaller institutions, while its influence on larger banks remains minimal,” the researchers said.
The bank lending channel of monetary policy was found to be “relatively weaker” for larger banks than the smallest banks.
“The limited responsiveness of larger institutions may dilute the effectiveness of monetary policy in influencing aggregate lending,” they said.
“However, the sensitivity of the smallest banks indicates that policy rate increases could still have a contractionary effect on credit supply, particularly for borrowers who depend on smaller financial institutions.”
Meanwhile, larger banks are “largely unaffected” because their diverse funding sources and robust liquidity management make them more resilient to policy changes.
“Therefore, if the BSP aims to influence aggregate credit growth, employing complementary tools targeting smaller banks could enhance monetary policy transmission, especially if the goal is to curb lending across the entire banking sector,” the BSP researchers said.
BSP Governor Eli M. Remolona, Jr. earlier said that the Philippines’ monetary transmission mechanism has long lags. — Luisa Maria Jacinta C. Jocson
