MANILA, Philippines – Demand for money continues to grow in October as domestic liquidity (M3) rose 32.5 percent year-on-year to P6.3 trillion, Bangko Sentral ng Pilipinas (BSP) data showed.
The rise was slightly faster than the 31.3 percent expansion recorded in September.
M3 is one of the economic indicators being watched closely by the central monetary authority as this may have an impact on the country’s inflation rate. It consists of money supply, peso, savings and time deposits and deposit substitutes of money generating banks or deposit money banks.
If the M3 level is high, this means there is too much money in the financial system. which may trigger inflationary pressures.
On a month-on-month basis, seasonally-adjusted M3 increased two percent, similar to the expansion record the previous month.
The BSP attributed the money supply growth to the sustained expansion in domestic claims, or credits to the domestic economy.
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Domestic claims grew 11.6 percent in October from 10.9 percent in September due to the continued increase in claims on the private sector (16.2 percent), in line with the sustained growth in bank lending.
Net claims on the public sector, on the other hand, rose five percent in October, largely as a result of the increase in credits to the government.
Net foreign assets (NFA) also grew 10.5 percent, from 7.7 percent in September.
The BSP said its NFA position improved on the back of robust foreign exchange inflows from remittances, BPO receipts and portfolio investments.
The NFA of banks likewise increased as banks’ foreign assets rose due mainly to the growth in foreign loans and receivables. At the same time, banks’ foreign liabilities declined due to reduced placements and deposits of foreign banks with their local branches.
The BSP’s operational adjustments in its special deposit account (SDA) facility also contributed to the M3 increase in October. It will be recalled that in accordance with the revised BSP SDA guidelines, the BSP has required trust entities to reduce their SDA placements by November 2013.
BSP said M3 growth is expected to normalize over the next few months after these adjustments are completed. The temporary period of strong M3 growth is not expected to contribute to inflationary pressures, as latest forecasts show that average inflation will continue to track the lower end of the inflation target in 2013, while future inflation path for 2014-2015 will also remain within the target range.
Going forward, the BSP said it would continue to monitor the potential impact of strong liquidity growth on the outlook for inflation as well as on financial asset prices.
The BSP stands to deploy appropriate measures as needed to ensure that liquidity conditions continue to be in line with the BSP’s objective of maintaining price and financial stability conducive to sustainable economic growth.
Meanwhile, BSP Governor Amando Tetangco Jr., in his speech before members of the Foreign Correspondents Association of the Philippines (FOCAP), has assured that faster liquidity growth will be temporary in nature.
“The uptick in liquidity growth will only be for a short transition period, as banks adjust to operational refinements to the access to the BSP’s SDA facility. With banks rebalancing portfolios to take these changes into consideration, banks could be expected to more expeditiously and effectively channel the SDA funds to the productive sectors,” he said.
The BSP chief likewise allayed fears of an asset bubble amid the liquidity growth in the market.
“The BSP has been ‘criticized’ as fueling a credit and asset bubble through low interest rates. I would say, this view is rather narrow. The BSP has reduced its policy rates to support growth to the extent the inflation outook has allowed it to,” he said.
He said monetary authorities have been closely watching indicators to ensure stability in the financial system.
“We have deployed macroprudential measures during the early stages of strong capital inflows and even earlier to help tighten regulatory screws. These include concentration limits on real estate lending, limits on open foreign exchange positions, and higher risk weight for non deliverable transactions. The BSP is mindful that there are many moving parts to the economic equation, and we will always consider the financial stability implications of our policy actions,” he said.
The country has sufficient policy space to deal with external shocks and their spillovers to the domestic economy, he noted.
“For one, the benign inflation environment affords the BSP the flexibility to fine-tune policy settings, as necessary, to support the domestic economy. The emerging estimates over the policy horizon continue to show within-target inflation. Therefore at this time, policy settings appear to continue to be appropriate. Even as inflation is within our comfort zones, we have it at the front burner. Our commitment to price stability is not only for its own sake but because this lays down the conditions for sustainable and balanced growth,” Tetangco said.
“The BSP will continue to maintain a flexible exchange rate policy that allows the market essentially to determine the exchange rate, but with scope for official action to ensure against excessive volatilities,” he added.
He said the BSP has been actively pursuing banking sector reforms that will enhance the soundness of the system, engender healthy domestic competition while enabling banks to level up against peers in the region.
