Domestic liquidity (M3) at end-October reached P1.464 trillion, indicating a year-on-year growth of 9.9 percent. This continued moderation in M3 growth for the fifth consecutive month since June can be traced, in part, to subdued lending activity of banks as well as weak corporate demand for new borrowings in the face of excess capacity in the economy.
In particular, the growth in net domestic credits of the monetary system slowed down to only 0.9 percent in October, from the 2.2 percent year-on-year rise in September. The increase in public sector credit in October at 14.4 percent year-on-year tempered the impact of the 4.3 percent decline in credits going to the private sector.
The slack in private sector credits can be traced mainly to banks’ continued prudence given the downsides in the global prospects and continued soft demand by corporates for new loans owing to spare capacity. In particular, the average capacity utilization of manufacturing firms declined further to 77.0 percent in September from 78.6 percent in the previous month. This has enabled continued production by firms without need for additional bank financing.
Looking forward, the recent monetary policy easing measures of the BSP—consisting of the cumulative 50-basis point cut in the BSP’s key policy rates in December 2001 and the 2-percentage point reduction in the liquidity reserve requirement on 7 December 2001—coupled with the holiday-related demand for money and credit are expected to stimulate economic activity and boost domestic spending.
In the months ahead, the BSP will continue to monitor monetary and financial conditions so that appropriate and timely policy responses are taken to keep domestic liquidity at a level consistent with the Government’s inflation and growth objectives.