Banking activities rising despite high interest rates?

PHILIPPINES - In Brief 09 Mar 2024 by Diwa Guinigundo

---

Contrary to the expectations of many, the Philippine economy sustained its expansion at 5.6% in 2023 from an extremely robust growth of 7.6% in 2022. Indeed, this was lower than the official target of 6% - 7% and what is required to recover its previous growth path prior to the pandemic of 2020. The expectation of much lower growth derived from the aggressive tightening of the Bangko Sentral ng Pilipinas (BSP) following the unprecedented rise in domestic inflation. In the last two years, inflation breached the official target of 2% - 4% at 5.8% in 2022 and 6.0% in 2023. Core inflation in 2023 was sharply elevated from 3.9% in 2022 to 6.6% in 2023, even surpassing the headline inflation. From 2022 to the end of 2023, the BSP jacked up its policy rate by a total of 450 basis points, or from 2.0% to 6.5%, more than three times. Many in the business sector thought it’s the end of the world. For them, the monetary authorities seemed bent on closing business in the Philippines to defeat inflation at all costs. They were wrong. High inflation could in fact undermine the growth process through lower private consumption and government expenditure. High inflation also discourages business precisely because high inflation turns off consumers. Thus, fighting inflation promotes growth. Credit was not extinguished in the Philippines due to high interest rates. Total domestic liquidity or M3 slowed down from 7.9% in 2021 to 6.9% and 5.9% in 2022 and 2023, respectively, but it didn’t decline. Deposit liabilities, both in peso and dollar, were also generally steady. Loans net of lending to the BSP, were generally resilient in the last two years. In fact, based on the banks’ rising loan...