Money tightening seen as inflation rises

Monetary officials all but assured the market that policy settings would be tightened anew this week to ward off further pressures that put official targets for price stability at risk.

Inflation, or the average movement of consumer prices, accelerated slightly in April. Data released yesterday showed that inflation remained elevated last month, albeit still within Bangko Sentral ng Pilipinas’ (BSP) target range.

“We will not hesitate to make preemptive adjustments to any of our policy levers in measured pace if the inflation target would be at risk or financial stability pressures heighten,” BSP Governor Amando M. Tetangco Jr. said.

Analysts expected the BSP’s policy-making Monetary Board to impose another one-percentage-point-increase in bank deposit reserve requirements this week as a way to quickly mop up cash from the economy. The BSP’s benchmark overnight borrowing and lending rates, which currently stand at record lows of 3.5 and 5.5 percent, are expected to be kept.

For April, inflation accelerated to 4.1 percent, faster than the 3.9 percent recorded the month before. Prior to the release of data on consumer prices, the BSP projected a range of 3.6 to 4.5 percent. The target for the year is for inflation to average between 3 and 5 percent.

In a statement to reporters, Tetangco said the BSP remained “watchful for any financial stability risks from the still-elevated liquidity growth rate.” Latest data showed domestic liquidity or the amount of cash circulating in the economy rose by 34.8 percent in March. Last January, liquidity growth reached a record high of 37 percent.

These growth rates—higher than the 20-percent expansion the BSP considers “normal—reflects the surplus of cash released in the system following the imposition of restrictions to the BSP’s special deposit accounts (SDA) last November.”

Mopping up this excess liquidity would force banks to restrict lending activities, tempering demand from both consumers and households and offsetting the effects of higher food and fuel costs on overall consumer prices.

The effect of elevated liquidity growth rates on consumer prices, officials said, remained negligible. The National Economic and Development Authority (Neda) attributed the acceleration in inflation to the tightness in supply of rice and corn and higher fuel prices as a result of adjustments in the world market.

Higher power costs due to the spike in demand during the summer months, as well as the several shutdowns of power plants, also contributed to higher inflation, Neda Director General and Economic Planning Secretary Arsenio Balisacan said.

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