By Lee C. Chipongian
The data-driven and evidenced-based Bangko Sentral ng Pilipinas (BSP) is advising market analysts and observers to look into the numbers more carefully before making strong suggestions for the Monetary Board to start easing monetary policy as soon as possible.
BSP Deputy Governor Diwa C. Guinigundo reiterated that any perceived tightness in liquidity is only temporary, and also that inflation – at 3.8 percent average for the first quarter – “has barely found itself in the target groove again” of two-four percent.
“I hope the banks and market analysts will be able to enhance their assessment before they ask the BSP to immediately ease monetary policy,” said Guinigundo. “Inflation expectations are still close to the upper end of the target. As to domestic liquidity (measured as M3) … M3 to GDP ratio continues to increase which indicates that we have ample liquidity to accommodate the requirement of economic growth.”
Guinigundo said that any liquidity tightness is temporary and mainly because of higher demand for cash for the Lent season, as well as the tax payment period and coming election in May. The yet-to-be-approved 2019 national budget is another factor.
“There was some restraint on public spending following the delay in the passage of the 2019 national budget despite the large fund raising exercise of the NG (National Government) through the BTr (Bureau of the Treasury). Demand for credit was somehow affected by the BSP’s deliberate policy to tighten monetary policy last year to strengthen inflation management which yielded positive results with the decisive reduction in inflation,” he explained.
But, Guinigundo said liquidity will soon return to the financial system.
“Spending and settlement, and subsequent re-deposit to the banks restore the liquidity position of the banks in varying degrees because some of them locked in their funds in loans, others decided to be long in dollars. Government payment of suppliers and contractors and accounts payable will involve withdrawal of its deposit with the BSP and will infuse more money supply to the market,” he said.
Earlier, commenting on some market analysts’ position on the declining M3, Guinigundo noted that while there are is lower excess liquidity today compared to three years ago, there is still excess liquidity in the market to speak of.
He said there is lower excess liquidity because banks have started to lend more and in a big way to finance economic activities, as well as investing more in government securities. Also, with continued uncertainty in the global economy, banks are buying plenty foreign exchange for hedging.
“Moreover, the BSP has tightened monetary policy to manage inflation in 2018 and smaller excess liquidity is something we should expect,” said Guinigundo. To control price pressures, the Monetary Board raised key rates by a combined 175 basis points last year. Inflation reached a peak of 6.7 percent in September and October 2018.
Guinigundo again empasized that the financial system is not running short of liquidity, far from it.
“It is true that the growth rates of both M3 and domestic credits slowed down to 7.1 percent and 13.7 percent, respectively (February). But, never lose sight of the fact that these indicators both show that while we address inflationary pressures, we have enough money supply to help accommodate growth,” he noted.
He cited as example the 2013 M3 number which expanded by 32 percent. At the time, M3 to GDP ratio was just 60 percent. In 2018, he said that while M3 growth has dropped down to nine percent, M3 to GDP ratio was close to 67 percent.
“In short, money and loans are in more ample supply relative to economic activities. There is more indeed than to monetary growth,” he stressed, adding that “the same observation applies to domestic credit growth which slowed down in the last five years but relative to GDP, the ratio continues to increase, and increase significantly.”