BSP reviews money supply data

The Bangko Sentral ng Pilipinas (BSP) is currently reviewing money supply or the data on base money to find out if they still have any use as indicator that BSP has to assess to determine monetary policy.

BSP Governor Eli M. Remolona Jr. said they have ongoing study and research on the structure of money supply and if they still need the reserves requirement (RR) to control domestic liquidity or M3.

He said the BSP still uses the money supply framework despite that empirically, M3 has no more use in terms of monetary policy. “It doesn’t help,” he added.

The current review is to determine if “M3 contains any information” that could be helpful in any way.

Remolona cited as example banks’ RR. He said that when they analyse RR, they try to see what is the effect on base money. “That’s very old fashioned,” he said.

He noted that the more appropriate question when analysing RR is “does it narrow the difference between lending rates and deposit rates?”

RR is akin to a tax on financial intermediation. The BSP has reduced the RR ratio from 12 percent to 9.5 percent for big banks last June 30.

Remolona said the more relevant issue is by how much will the difference between the lending rates and the deposit rates will be affected if RR ratios are lowered. 

“It’s no longer about base money … that doesn’t matter to the economy,” he said. Base money or monetary base money is total banknotes and coins in circulation.

The BSP has done studies on this and continue to do so to determine if its expanded open market operations is enough for excess liquidity management. Excess money supply in the financial system tend to be inflationary.

Since last year, reserve money is already the sole monetary base indicator of the BSP. Reserve money is both base money and central bank money. It includes securities, foreign currency and investments held by the central bank.

The BSP has said that in line with its “continuing efforts to align its monetary and financial statistics with international standards” and upon the recommendation of the International Monetary Fund (IMF), since January last year, the BSP was only releasing one monetary base indicator for the Philippines, and that is reserve money.

Base money was disseminated only until the end of 2021.