SLOWING money supply growth will enable the central bank to keep its policy rates at the current levels for the rest of the year, giving the economy enough room to further grow.
With the risk of rising inflation held at bay due to falling oil prices, interest rates may be kept steady, Metropolitan Bank & Trust Co. said in a note to clients.
“The downtrend in money supply has helped dampen the upward pressure on inflation,” Metrobank said this week.
Latest data from the Bangko Sentral ng Pilipinas (BSP) showed an 8.7-percent increase in the amount of cash circulating in the economy at the end of November. This comes from a peak of 37 percent in February of 2014, and 34.7 percent in November 2013.
The decline in domestic liquidity, or M3, is a result of base effects and of past monetary policy measures implemented in 2014 aimed at mopping up excess cash from the economy. Earlier, the BSP ordered banks to set aside more of their clients’ deposits as reserves.
Yields on special deposit accounts (SDA) were also hiked to encourage banks to keep more idle cash in BSP vaults. These adjustments were made ahead of hikes in the benchmark overnight borrowing and lending rates from record lows by half a percentage point each.
“The expectation that M3 growth will continue to stabilize this year would also boost the prospect that inflation for 2015 will also remain low and manageable,” Metrobank said.
With inflation kept at manageable levels, the BSP will have room to keep its benchmark policy rates steady without the fear of stoking price pressures. After peaking at 4.9 percent in July and August, inflation in 2014 averaged at 4.1 percent or near the midpoint of the central bank’s target range of 3 to 5 percent.
This year, the BSP expects inflation to average at 3 percent, or right at the middle of the new target range of 2 to 4 percent.