News Column

Money supply slowdown to temper Q3 inflation

June 24, 2014

By Mayvelin U. Caraballo, The Manila Times, Philippines



June 24--MONEY supply growth is expected to slow further in the third quarter of this year, thanks to the central bank's recent tightening bias, which should help tame inflation and keep the financial system stable.

According to a joint report by First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P), the recent hike in banks' reserve requirement ratio (RRR) will mop up excess domestic liquidity by the third quarter of this year.

"Money growth will likely ease further, partly due to base effects and partly due to the 2014 hikes in reserve requirements, toward the 15 percent to 20 percent range by June and decelerate faster in the third quarter," FMIC and UA&P said in the June issue of The Market Call.

At its March 27 monetary policy meeting, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) decided to increase the RRR for banks to 19 percent, raising it further to 20 percent at its May 8 meeting, in a bid to siphon off excess liquidity from the financial system.

On June 19, the BSP's policy setting body kept its key rate unchanged but raised the rate on the special deposit account (SDA) facility by 25 basis points to 2.25 percent.

Raising the SDA rate is seen as a prudent hedge against price or stability risks caused by excess liquidity in the financial system.

The BSP said that the Monetary Board's latest decision to adjust the SDA rate was meant to counter risks to price and financial stability that could emanate from ample liquidity, noting that a modest upward adjustment in interest rates would be prudent amid robust credit growth.

The Monetary Board also believes that solid domestic growth prospects allow some scope

for a measured adjustment in the SDA rate to ensure that monetary and credit conditions continue to be appropriate.

The SDA facility is a tool that the BSP uses to manage excess liquidity in the financial system. Raising the interest rate in general encourages higher bank deposits in the SDA facility and helps to counter inflation by isolating some money from the financial system.

Monetary authorities have been closely monitoring liquidity growth because of its impact on domestic inflation.

The central bank is targeting inflation to be within a range of 3 percent to 5 percent in 2014, and 2 percent to 4 percent in 2015.

For this year, inflation is projected to average 4.4 percent, factoring in potential price pressures emanating from a possible uptick in food prices as a result of changing weather conditions, and from pending petitions for adjustments in power rates.

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(c)2014 The Manila Times (Manila, Philippines)

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Source: Manila Times (Phillipines)


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