By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) reported that domestic liquidity – measured as M3 – grew by seven percent year-on-year in April to P11.7 trillion. M3’s pace of growth is faster compared to March’s 6.1 percent.
Month-on-month, M3 was up by 1.5 percent. M3, or “broad money liabilities” consists of M2 or “broad money” plus peso deposit substitutes, such as promissory notes and commercial papers.
The BSP closely monitors domestic liquidity dynamics to “ensure that overall monetary conditions remain in line with maintaining price and financial stability.”
Too much liquidity is inflationary and one of BSP’s job in fulfilling its mandate of price and financial stability is managing the financial system’s excess liquidity. These days, the BSP’s primary liquidity-control tool is its auction-based open market operation.
In April, the central bank said demand for credit “eased slightly but remained the principal driver of money supply growth.”
Domestic claims were up by 9.5 percent during the period, a faster expansion than March’s 9.8 percent, mainly because of sustained growth in credit to the private sector. Net claims on the central government, in the meantime, were slightly up by 0.5 percent in April from 0.2 percent in March.
As for net foreign assets (NFA), in peso terms this rose by 3.8 percent in April from the previous month’s 2.1 percent.
“The BSP’s NFA position continued to expand during the month, supported by foreign exchange inflows coming mainly from overseas Filipinos’ remittances and business process outsourcing receipts. By contrast, the NFA of banks decreased as their foreign liabilities rose due to increased placements and deposits made by foreign banks with their local branches and other banks,” explained the BSP.
The central bank under its new chief, Governor Benjamin E. Diokno, is known by market observers as an expansionary BSP governor.
Last month, the BSP not only reduced key overnight rates by 25 basis points (bps) for the first time since 2012, but also reduced the reserve requirement ratio (RRR) of all banks by as much as 200 bps, which will release at least P210 billion of additional liquidity into the financial system.
Lowering policy interest rates and reducing the RRR are monetary policy actions that are expansionary which the BSP said “tends to encourage economic activity as more funds are made available for lending by banks.” However, it also said that such actions “increases aggregate demand which could eventually fuel inflation pressures in the domestic economy.”
The BSP in 2018, and now Diokno as new BSP chief, has called RRR cuts as “operational adjustments” that are “in line with the BSP’s objectives of enhancing the effectiveness of monetary policy and deepening the domestic money market.”
Diokno has said that it was the right time to reduce the RRR of big banks by another 200 bps with the continued decline in inflation which as of end-April, averaged at 3.6 percent, within the government’s two-four percent target.
The Monetary Board has also assessed that there is tightness in domestic liquidity conditions because of the four-month delay in the implementation of the 2019 national budget which “limited public expenditure following the budget impasse in the first quarter of the year.”