Cash growth slowed in May, BSP reports

Regulator keeps rosy outlook on inflation By Daxim Lucas

Inquirer
Last updated 04:11am (Mla time) 06/30/2007

MANILA, Philippines — The central bank’s fears of an acceleration in price increases eased Friday after data revealed a slowdown in the growth of cash sloshing around in the economy.

At the same time, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said that the decision of the US Federal Reserve to keep its own key interest rates unchanged gave local monetary planners more room to keep domestic borrowing costs relatively low.

More importantly, however, domestic liquidity numbers released yesterday validated the central bank’s decision to refrain from cutting its overnight rates further at the height of calls for lower interest rates in the first quarter of 2007.

 

“Our outlook for inflation continues to be favorable and there are early indications that the monetary measures we put in place in early May are achieving the desired effects,” Tetangco said in a text message to reporters.

 

The BSP chief was referring to money supply data for May, which showed that domestic liquidity growth slowed down to 21.1 percent year-on-year from a 26.6-percent increase in April.

 

Money supply or domestic liquidity represents all the cash and liquid assets circulating in the local financial system.

 

Rapid money supply growth contributes directly to higher prices as more money chases after a limited amount of goods and services, prompting price increases.

 

The central bank expects the June inflation rate to come in between 2.2 percent and 2.9 percent.

 

It presently stands at an average of 2.7 percent for the first five months of the year.

The May money supply numbers signify the first time that the growth rate slowed down since February 2007 when the rate dropped to 22.4 percent from the previous month’s 22.8 percent.

“Growth in the net foreign assets of depository corporations continued to drive [money supply], albeit at a slower pace of 32.6 percent from 37.9 percent in April,” the central bank said in a statement.

Net domestic assets also posted a decelerating growth trend at 6.4 percent from 12.5 percent in the previous month.

“In particular, growth in credit to the public sector slowed down to 11.8 percent from 18.2 percent during the same period,” the central bank added.

 

This was partly offset by the continued expansion in credit to the private sector, which rose by 5.8 percent from 5.2 percent, as lending to entities other than financial corporations was sustained during the month.

BSP’s stance was boosted by developments in the world’s largest economy where the US Fed kept interest rates unchanged at 5.25 percent.

“The broadly expected Fed decision to leave rates unchanged gives us some flexibility in our own rate setting,” Tetangco said.

 BSP’s own overnight borrowing rate — closely followed by banks for pricing their own commercial loans –stands at 7.50 percent.

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