Wary of liquidity rise, BSP may still keep key rates
Changes in monetary settings at next week’s policy meeting are unlikely, but monetary officials have admitted that they are now concerned with the excess cash circulating in the economy, which may stoke inflation pressures.
Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. on Tuesday said the Monetary Board still had room to keep key interest rates steady as inflation stayed within the forecast range.
The BSP’s policymaking body next Thursday will decide on the country’s key rates.
“The policy stance continues to be appropriate given the target range we have projected, but we have also seen an increase in domestic liquidity,” Tetangco said during a press conference.
Since late 2012, the BSP’s benchmark overnight borrowing and lending rates have stood at record lows of 3.5 and 5.5 percent, respectively. Despite the low rates, consumer prices rose by an average of just 3 percent in 2013, or at the low end of the central bank’s target range.
This year, however, the BSP sees inflation averaging at 4.25 percent, or near the top end of the official 3- to 5-percent target.
Tetangco said the higher inflation forecast for the year relative to the target meant that the space to keep rates accommodative of economic growth had “narrowed.”
He said projected inflation could breach the target due to various risks, not least of which was the recent acceleration in the growth of the country’s money supply.
In January, domestic liquidity, or M3, rose by a record high of 38.6 percent, forcing BSP officials to rethink their assumptions for the country’s money supply.
The original surge in domestic liquidity was brought on by the withdrawal of individual investments from the BSP’s special deposit account (SDA) window.
This development “needs to be watched,” Tetangco said. “The expectation is that the spike will be temporary. We expect the growth rate to slow down during the course of 2014. Nevertheless, it will be prudent to keep an eye on the behavior of liquidity.”
