GROWTH in the country’s money supply may decelerate sharply to single-digit rates at the start of the third quarter as the recent monetary policy actions of the central bank have proven to be effective, a report said.
“The previous adjustments in the SDA [special deposit accounts]interest rates and in the reserve requirement ratio [RRR] have proven effective in bringing domestic liquidity growth in line with the real sector’s growth,” First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a joint report.
In their “The Market Call,” report, FMIC and UA&P cited the latest data from the Bangko Sentral ng Pilipinas (BSP) which showed that domestic liquidity or the amount of cash and cash-equivalent securities circulating within the economy grew by 23.0 percent to P7.1 trillion year-on-year in June, slower than the 28.4 percent expansion recorded in May.
The Monetary Board of the BSP at its March 27 meeting raised the RRR for banks to 19 percent, then 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 policy-setting body increased the rate on the SDA facility by 25 basis points (bps) to 2.25 percent.
FMIC and UA&P pointed out that despite the easing of money growth in June, the MB decided during its July 31 meeting to raise its two key interest rates by 25 basis points each, while keeping the RRR and SDA rates unchanged.
“The BSP noted that these changes are meant to mitigate upside inflation risks without restricting growth because of the country’s robust domestic demand. We believe that this and previous monetary tightening moves will result in a rapid deceleration of money growth starting the third quarter,” they stated.
Despite their view that money growth will slow down to a low single-digit pace starting in the third quarter, FMIC and UA&P pointed out that the central bank will still hike either the policy rate by another 25 bps or reserve requirements by additional 100 bps before the end of the year.
“This will be more a show of a hawkish stance as the BSP continues to minimize its interest payments on account of its liquidity mopping moves,” they said.