Central Bank braces for expansionary credit cycle as worst seems behind

• Highlights enormous stresses financial system endured during economic crisis 
• Says both credit cycle and asset quality appear to have bottomed out in 3Q23 
• Household and even big corporate balance sheets came under severe stress during crisis, affecting their credit worthiness
• Says stands ready to intervene to minimise macro-prudential risk stemming from an accelerated credit cycle 

The Central Bank is bracing for an upcoming expansionary credit cycle, driven by the initiation of relaxed monetary policy measures, as the effects of consecutive policy rate cuts, targeted initiatives to expedite monetary policy transmission and a subdued inflation environment are gradually contributing to the easing of financial conditions. 
Releasing what is referred to as ‘Financial System Stability Review for 2023’, the Central Bank yesterday showed the enormous stresses the country’s financial system underwent with the economic crisis last year, causing the growth to stall and the asset quality to deteriorate, as scores of borrowers fell into default amid the steep rise in rates and loss of incomes.  
But it appears that the sector has bottomed out in both areas in the third quarter, with improvement in credit and the peak in non-performing loans has been reached, with expectations rising for momentum to build in the upcoming period.
“Reflecting the early impact of monetary policy easing, the private sector credit-to-GDP gap (the credit gap), which reflects the status of the credit cycle, signals that the trough of the cycle had passed and the cycle has entered the recovery phase,” the Central Bank said in a detailed statement issued on the health of the financial system coming through the toughest of times since last year.
The data indicated that credit to the private sector gained momentum for the fifth consecutive month in October, continuing to expand at an accelerated pace. 
The acceleration in credit is expected to add a tailwind to the demand conditions in the economy, which is showing some improvement as of late from the cooling consumer prices.  
A slew of demand destruction policies from the higher rates to higher taxes and expenditure cuts were instituted from last year to bring fiscal stability to the economy, a prerequisite for durable economic stability. 

This led to a significant deterioration in both the household and corporate balance sheets, eroding their debt repayment capacity, with a knock-on impact on the asset quality of the banks and finance companies.
With inflation currently on a downward trajectory and the Central Bank unwinding its ultra-tight monetary policy, a robust rebound in financial intermediation is anticipated. This is particularly expected in the banking and finance sectors, aiding households and businesses in gradually improving their debt serviceability.
“Moreover, targeted stabilisation of domestic inflation at 5 percent in the medium term is expected to enhance the purchasing power of economic agents and improve their debt repayment capacities,” the Central Bank said.  
However, the Central Bank remains aware of the possible macro-prudential concerns that could build up as a result of an accelerated credit cycle and said it remains committed to monitoring these developments closely and implementing the necessary policy actions to mitigate systemic risks and ensure financial stability.