Domestic liquidity to normalize in H2 – BSP

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THE central bank said it expects money supply growth or domestic liquidity to moderate starting July this year as the hikes in banks’ reserve requirement ratios that it implemented earlier this year begin to yield results.

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According to Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr., the slowdown in domestic liquidity or M3 growth seen in April came within the expected path projected by the central bank.

After months of robust growth, money supply in April expanded at a slower pace of 32.1 percent to P6.9 trillion after rising by 34.7 percent in March. Money supply refers to the total amount of cash and cash-equivalents circulating within the economy.

To guard the economy against risks that could arise from strong domestic liquidity, the central bank, through its policy setting body, the Monetary Board, decided to raise banks’ reserve requirement ratios (RRR) to mop up excess liquidity from the financial system.

In its March 27 and May 8 meetings, the Monetary Board raised the RRR for banks by one percentage point each time, to 19 percent and 20 percent, respectively.

“As the twin RR adjustments (effective on April 11 and May 10) continue to work their way, we see M3 growth reaching normal levels in the second half of the year,” Tetangco said in an e-mail to reporters over the weekend.

Meanwhile, global bank HSBC expects the central bank to impose another RRR hike in its June 19 meeting to further soak up excess liquidity in the wake of the higher-than-expected May inflation rate of 4.5 percent.

In a recent commentary, HSBC noted that headline inflation rose more than expected on higher food and housing prices, reflecting supply-side constraints and excess liquidity.

The bank noted that as the summer months approach, headline inflation will edge even closer to the upper end of the BSP’s 3-percent to 5-percent target range.

“This leaves the central bank little choice but to raise the RRR by 1 percentage point to 21 percent,” it said.

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