Strong forex inflows may trigger surge in inflation - BSP

By Des Ferriols
The Philippine Star 04/23/2007

After announcing that it was mopping up liquidity beginning next month, the Bangko Sentral ng Pilipinas (BSP) said its projections showed imminent inflation surge over a one-year period due to strong foreign exchange inflows.

The BSP said over the weekend that although the current domestic money supply situation did not pose a threat to the present inflation rate, projections are showing prolonged rapid growth.

BSP Governor Amando M. Tetangco Jr. told reporters that it was this risk that the Monetary Board saw as something that needed to be addressed to remove the inflationary pressures down the road.

"We’re looking here at the same policy horizon of 15 months to two years," Tetangco said. "So that is an indication that the effects of what we have done would take time and needed to be done this early before the potential risks become real problems, he added."

The BSP last week announced that it would take steps to arrest the rapid growth in money supply by luring government deposits away from banks while keeping all its monetary policy settings unchanged.

The new measures, according to Tetangco, were expected to ultimately slowdown the growth in domestic liquidity to below 20 percent, a level that the central bank said it considered "sustainable and not inflationary."

Although the economy appears to be able to absorb the additional liquidity from strong foreign exchange inflows, however, there is now growing concern over a prolonged acceleration of the growth in money supply.

Domestic liquidity growth continued to surge in February, expanding by 22.4 percent. This was only marginally slower than the 22.8 percent growth rate recorded in January this year.

The new measures, according to Tetangco, are expected to slowdown the growth in domestic liquidity to below 20 percent, a level that the central bank said it considered "sustainable and not inflationary".

The policy, however, came within less than six months of the BSP’s decision to tier the rates on bank placements with the BSD, a move that was estimated to have resulted to monetary easing by at least 200 basis points.

 

http://www.philstar.com/philstar/NEWS200704230703.htm