Money supply expands slightly to P11.38 trillion

MANILA, Philippines — The amount of money circulating in the country’s financial system grew at its weakest level in more than six years at 4.2 percent in March from 7.1 percent in February.

Latest data released by the Bangko Sentral ng Pilipinas (BSP) showed money supply or M3 reached P11.38 trillion as of end-March from P10.92 trillion in end-March last year.

The level of liquidity is one of the factors being considered by monetary authorities, aside from domestic demand and inflation, in setting policy rates.

Due to tight liquidity amid the strong demand for cash during the tax season as well as long holidays, the BSP has lowered the volume of the term deposit auction facility (TDF) that serves as its main tool for absorbing liquidity.

The central bank is looking at a double-digit growth in liquidity with the planned resumption of the reduction of the level of deposits banks are required to keep with the BSP amid easing inflation.

The BSP has reduced the reserve requirement ratio (RRR) for banks twice last year to 18 percent from 20 percent, releasing around P190 billion in additional funds in the financial system to support the growing economy.

The first reduction that took effect last March 2 injected P90 billion in fresh funds into the system, followed by another 100 basis point cut last June 1 that poured around P100 billion in additional liquidity into the economy.

Inflation accelerated sharply to 5.2 percent last year from 2.9 percent in 2017 due to higher oil and food prices as well as the weak peso. It peaked at 6.7 percent in September and October but eased to a 15-month low of 3.3 percent in March.

This has allowed the BSP to take a breather from its tightening episode by keeping rates unchanged since its last increase in November.

BSP Governor Benjamin Diokno said last Monday the reversal of the tightening cycle last year and the reduction of the reserve requirement ratio are “inevitable” and monetary authorities are just determining the right timing.

“That’s obvious. As things normalize, naturally, we should move towards normalization,” Diokno said.

The BSP’s Monetary Board lifted rates by 175 basis points in five straight rate-setting meetings between May and November to prevent inflation from spiralling out of control.

Likewise, the BSP is resuming the reduction of the RRR as the late BSP governor Nestor Espenilla Jr. committed to bring down the level to single digit by 2023.

“To me, that is also clear because we have one of the highest reserve ratio in this part of the world. So its clear that we need to reduce that to be more competitive,” Diokno said.