060107: Liquidity swells to 26.3%, but MB keeps rates as is

By Jun Vallecera

Reporter

DOMESTIC liquidity growth, known as M3 among economists, accelerated further to 26.3 percent in April and marked the fifth time in a series this has grown at the worrisome and rather unwanted clip of above 20 percent. Still, monetary authorities deemed it better to keep the policy rates unchanged. If unchecked, the growing supply of money in the hands of every working Filipino translates to higher inflation down the line and puts a damper on growth seen accelerating as high as 6.1 percent this year in terms of the gross domestic product. This was the fastest M3 growth yet this year, Bangko Sentral ng Pilipinas deputy governor Diwa C. Guinigundo acknowledged in a mobile phone message to the BusinessMirror on Thursday. M3 growth hit a high of 45.4 percent in April 1995, a year when domestic liquidity growth in the 30-percent level was common, BSP Governor Amando M. Tetangco Jr. said. But the seven-member monetary board that decides policy at the BSP considered the threat posed by continued M3 expansion in April as insufficient ground to adjust the current monetary policy settings. In a statement, Tetangco said the overnight borrowing rate remains at 7.5 percent and the overnight lending rate still at 9.75 percent. Had the continued M3 growth in April been considered a threat to the stability of prices 15 to 21 months down the line, the Monetary Board would have already made the adjustments such as appropriately increasing its borrowing rate to bring back some of the extra peso liquidity to the vaults of the BSP. Adjustments in policy rates are one of several monetary policy options available to the BSP. “The Monetary Board assessed that the outlook for inflation over the policy horizon continues to be benign, due mainly to easing supply-side pressures, moderate demand pressures and well contained inflation expectations,” said Tetangco, who chairs the Monetary Board. Ample food supply of major food items, the subsiding impact of the higher value-added tax rate of 12 percent and the strong peso all contributed to the continued downtrend in inflation, according to Tetangco. But he and the rest of the Monetary Board have raised the red flag over the still-accelerating M3 growth and the havoc this creates on price stability down the line if this was not successfully contained. “Sustained growth in domestic liquidity remains a key policy concern,” Tetangco said. He and Guinigundo said earlier the immediate goal is to lower M3 growth to below 20 percent the soonest. This was why, Tetangco said, the tiering system on bank placements with the BSP was kept in place, including placements by trust entities called special deposit accounts, or SDAs. That system was put in place in November last year as a symbol of a more relaxed monetary policy stance, even though some have suggested scrapping the mechanism. Factors potentially causing inflation to move up over the near term also include the volatile oil prices and additional wage adjustments sought by the labor sector.

 

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