BSP expected to start tightening monetary policy

The central bank may finally start sending signals by next month on the possible tightening of its monetary policies to keep the country’s booming economy from overheating, the Institute of International Finance (IIF) said.

In a research note this week, IIF noted signs of the possible overheating of the Philippine economy, which the firm expects to grow by 7 percent this year.

These signs may lead to an acceleration in price increases, the IIF said, undermining the purchasing power of local consumers.

“Preserving economic and financial stability will fall mostly on monetary policy, suggesting that the Monetary Board is likely to signal it is leaning toward tightening at its next scheduled meeting on Sept. 12,” IIF said.

The firm said the continued expansion in the country’s money supply, if not kept in check, would lead to price pressures that could threaten the stability of local financial markets.

“The strong momentum in the economy and abundant liquidity has shifted the risk ahead from growth to overheating,” IIF said.

The research firm credited the Aquino administration for the improvement in revenue collections that has kept the country’s fiscal deficit at around 2 percent of gross domestic product, despite increased spending on infrastructure projects.

Efforts to promote good governance have helped raise the country’s profile internationally, attracting foreign investors even at a time of financial market volatility.

This continuing stream of foreign money, coupled with the flow of overseas Filipino workers (OFW) remittances pushed domestic liquidity or M3 growth levels past the 20-percent market last June.

“An important factor underlying the financial market volatility has been the rising global prominence of the Philippines,” IIF said. “The current government’s success in building a record of fiscal control and improving public governance has helped assuage a long period of risk aversion and neglect by foreign investors,” it added.

IIF said a signal to the potential tightening of monetary policies could help maintain the stability of the financial system in the face of growing liquidity.

Earlier this month, BSP Deputy Governor Diwa C. Guinigundo warned that a protracted period of high M3 growth may pose risks to the Philippine economy if it leads to higher inflation.