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BSP vows to ensure risks to inflation checked |
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By LEE C. CHIPONGIAN
The Manila Bulletin 11/02/2005 Domestic liquidity or M3 growth remained on the high side or 14.8 percent to P2.241 trillion in September from P1.951 trillion a year ago. Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. said that if the increasing liquidity continues and interest rate differentials narrows some more this could again threaten inflation targets and forecasts. The BSP comfort level is 13 percent but since July M3 growth has been exceeding this level. M3 is the country’s availability of cash and non-cash resources and can be traced mainly to the build-up in banks’ foreign exchange position. Liquidity also comes from external inflows. "The central bank will continue to monitor the level of domestic liquidity to ensure that it is consistent with the BSP’s price stability objective," Tetangco said. He added that overall monetary policy stance would remain "geared towards ensuring that all emerging risks to inflation and inflation expectations are addressed in a timely and appropriate manner." According to the BSP’s Depository Corporations Survey, the sustained expansion in liquidity is due to the increase in the net foreign assets of deposit corporations, influenced by the strong cash remittances by migrant Filipino workers and portfolio investments. Deposit money banks’ net foreign assets increased year-on-year by almost 10 percent in September while the net international reserves of the BSP improved with the increase in its foreign assets coupled with a decline in its foreign liabilities, the BSP said. The last four policy actions undertaken by the BSP were a rates increase in April September and October by 25 basis points each and the raising of reserve requirements on bank deposits by two percentage points last July. The reserve hike siphoned off excess liquidity, which is inflationary. Tetangco said the level of money supply in the financial system continues to be under close watch to ensure an appropriate level of liquidity to support the economy’s growth requirements, while guarding against any build-up in price pressures. The last BSP monetary actions can be attributed to the continued growth in liquidity. "The sustained rapid growth in domestic liquidity (added to the concern)," said Tetangco. He said the financial system remains very liquid despite the recent increase in the policy rate and the reserve requirements. "The additional liquidity in recent months has been fueled by both foreign exchange inflows and by the deposit generations activities by banks." The growth in the money supply are not necessarily channeled into consumption and investment spending, given that growth in bank lending has remained moderate and aggregate demand is slowing down. The BSP said combined with excess liquidity in the financial system, a shift toward dollar assets could lead to volatility in the peso-dollar exchange rate, which in turn could raise inflation and inflation expectations. The four supply-side factors the BSP is closely looking at is one, the impact of the two-percentage point increase to value added tax, transportation adjustments to inflation, oil price hike and National Power Corp. rates increase. The most crucial impact to inflation or secondround effects will come from demand-side factors such as the wage increase, which the BSP has also factored in. |
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