Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the monetary authority would continue its mopping up operations until the utilization of liquidity could catch up with foreign exchange inflows.
Despite the slowdown in the inflation rate and even the growth in domestic liquidity, Tetangco said the economy has not caught up with the rapid growth in foreign exchange inflows into the country.
Speaking before the Manila Rotary Club yesterday, Tetangco said the lag between foreign exchange inflows and the growth in the productive sector was significant.
This means that excess liquidity could build up even with gross domestic product (GDP) growing at seven percent last year and by over six percent this year.
“We cannot leave all that liquidity sloshing around in the system,” Tetangco said. “So we need to keep mopping them up.”
Tetangco said that if the utilization capacity of the economy could be accelerated, then the BSP could ease up on its mopping up operations since the robust foreign exchange inflows would not cause inflationary pressures to build up.
Given the expected economic slowdown in 2008, Tetangco said domestic liquidity growth should average at 15 percent this year, one percentage-point higher than the 14 percent level pegged for 2007.
He said this was the basis for the BSP’s three to five percent inflation target next year.
According to Tetangco, the BSP is looking at a wider range of 12 to 15 percent money supply growth which he said already assumed the slowdown in GDP growth.
Foreign direct and portfolio investments are expected to remain strong in 2008 and remittances from overseas Filipinos are expected to surge, but Tetangco said money supply growth would remain manageable despite the anticipated slowdown in the economy.
“There is financial deepening going on, so that a strong growth in domestic liquidity need not be inflationary,” he said. “What we need to do is maintain a level of domestic liquidity that would ensure that prices remain low and stable, while providing the needed liquidity for economic growth.”
As money supply growth reached over 26 percent earlier this year, the BSP has been able to slow it down to 11 percent even as the economy was expanding by seven percent.
However, the BSP has not lifted its mopping up activity and even eased its key policy rates three times in a row by a cumulative total of 7.5 percentage points.
“I would agree though that very low levels of liquidity growth may not be consistent with sustained GDP growth at the same or higher pace,” Tetangco said.
“What we would really need to see at this time is an increase in demand for credit for investment and other productive endeavors as the means of absorbing the liquidity that is coming mainly from the external side,” Tetangco said.