By LEE C. CHIPONGIAN
The Bangko Sentral ng Pilipinas (BSP) yesterday Monday said domestic liquidity (M3) expanded by 10.9 percent year-on-year in February to ₱12.8 trillion, a slower growth compared to 12 percent in January.
Before the implementation of the enhanced community quarantine (ECQ) on March 17, M3 on a month-on-month seasonally-adjusted basis dropped by 0.3 percent.
MB file photo.
By March 30, the BSP approved the release of fresh liquidity in the financial system – about ₱225 billion – after it cut banks’ reserve requirement ratio (RRR) by another 200 basis points (bps). A pending additional RRR reduction of 200 bps will infuse the banking system with more funds for lending, to buy government securities or reinvest in the BSP’s open market operations.
According to BSP Director Dennis D. Lapid of the Department of Economic Research, liquidity measures implemented will take some time to fully work their way into the economy.
“We expect that for the next few months there will be an improvement on both liquidity conditions and crucially also on lending by the banks to the public,” said Lapid in an online press briefing. Bank lending grew 12.2 percent in February, more than the 11.6 percent recorded in January.
He said however that in the few weeks, as a result of some of the liquidity provision measures implemented by the BSP, there were “some improvement in the overall market liquidity, for example in the government securities or in the bond market.”
Lapid said growth in liquidity and in credit conditions generally are considered a “positive influence” on inflation which the BSP now expects will settle at two percent for this year, and 2.45 percent for 2021.
“In our forecasting models the higher liquidity and credit growth are a positive influence on inflation but I think the key consideration in this situation is that the possibility of weaker domestic demand could have an impact on liquidity and the lending activity of the banking system which is why we’ve taken measures to ensure that there will be enough liquidity in the system and that will help encourage the banks to lend to their clients,” said Lapid.
The BSP director reiterated what central bank Governor Benjamin E. Diokno has said that the Monetary Board has “ample policy room” to provide more stimulus if necessary to the economy and this is mainly due to a benign and subdued inflation environment.
“Based on the data we have, inflation expectations continue to be well-anchored to the two-four percent government target and at the same time the BSP has clearly indicated our willingness to make use of the full range of our instruments within our toolkit in order to provide the necessary liquidity support for financial markets and economic activity,” said Lapid. “It will be important for policy makers to continue to look at the data to see if some of our recent implemented measures are taking hold or having their effect on liquidity and economic activity. In terms of the overall policy space, the BSP still has a lot of options, apart from the policy rate and the reserve requirement, he added.
Based on the M3 report, demand for credit remained the principal driver of money supply growth in February. Domestic claims grew by 10.3 percent from 11.7 percent in January because of the sustained growth in credit to the private sector, particularly for production activities.
The BSP said it will “remain vigilant in monitoring domestic liquidity and credit dynamics amid significant disruptions to economic activity” and that it “reassures the public of its commitment and readiness to deploy its full range of instruments to ensure that liquidity and credit remain adequate amid the ongoing health crisis.”