BSP: Economy safe from overheating – Business Mirror

BSP: Economy safe from overheating

The relationship between money supply and inflation waned the past 18 years so liquidity, which grew the fastest in six years to 16.3 percent in May, should not prove worrisome, monetary authorities said.

Bangko Sentral ng Pilipinas (BSP)Governor Amando M. Tetangco Jr. has repeatedly given assurance that the acceleration of money-supply growth in recent months was a welcome rather than a worrisome development.

On Sunday Deputy BSP Governor Diwa C. Guinigundo said while the growth of M3, the technical term for money circulating in the financial system, accelerated from only 13.3 percent in April, its potential for overheating the economy has sharply diminished.

That much growth translates to money supply totaling P5.3 trillion in an essentially P11-trillion or P12-trillion economy.

“Inflation used to be driven mainly by money supply. This relationship has weakened as early as the mid-1990s. I don’t think an M3 growth [averaging 16.3 percent in May] could lead to higher inflation or overheating,” Guinigundo said.

The fear of overheating, expressed in the form of high inflation, had been dismissed at various times in the past. On Sunday Guinigundo reiterated the fear of fast-rising inflation over the near term is a remote possibility.

“The double-digit growth in M3 can actually provide greater support for economic activities in the context of the Philippines’s robust economic growth. We believe overheating is a remote issue because the potential capacity of the economy has gone up. In addition, productivity has improved while efficiency appears to have also climbed in recent years. Most important, there is no evidence yet that the economy is beginning to overexpand,” Guinigundo said.

His assertion is based on latest data on bank lending, which grew at a faster pace in May to 13.1 percent, or to P3.523 trillion from only P3.111 trillion a year earlier.

The deployment of bank funds into productive undertakings means the money has not been used for financial mischief, for instance, such as the unwarranted purchase of real estate for speculative purposes rather than for practical ends.

According to the BSP, so-called production loans making up four-fifths, or 80 percent, of the combined loans extended by banks during the period picked up speed in May, growing by 13.3 percent from only 12 percent in April.

These are loans funding the acquisition of real estate, renting and businesses; wholesale and retail trade, financial intermediation, manufacturing and even loans benefiting agriculture, hunting and forestry, as well as fishing.

“The continued brisk growth in bank lending suggests adequate funding for domestic economic activity in the months ahead. Going forward, the BSP will continue to monitor the domestic financial environment to ensure that liquidity and credit conditions remain supportive of the expanding domestic economy while remaining consistent with its price stability objective,” the BSP later said in a statement.

Guinigundo also pointed to a related development at the local equities market, which has entered a phase that market players call a correction. It is essentially a period when foreign-fund managers sell their peso asset purchases and repatriate their foreign currencies to overseas parents, while the locals wait and see for opportunities to present themselves also.

“There has been the welcome correction in the equities market. The peso has shown some depreciation and the bond market has been showing stronger discipline,” Guinigundo said.

Earlier, the BSP deliberately crafted rules effectively pushing out an estimated P1 trillion worth of idle money invested as the banks’ special deposit account (SDA) at a special window in an effort to redeploy them into more productive undertakings.

Analysts at the First Metro Investment Corp., for instance, have calculated the redeployment effectively flushes out an estimated P200 billion to P300 billion.

But the BSP has made it clear the entire batch of more or less P1 trillion worth of SDA accounts at its special window had to go by November this year, indicating confidence that even with this much money in the system, the economy would continue to expand by up to 7 percent this year in terms of the gross domestic product.

Against that backdrop, the BSP effectively said for the nth time on Sunday that inflation, thus far averaging 2.6 percent in the first five months, would end the year within the 3-percent to 5-percent target range.

In more recent public pronouncements, the BSP said inflation would likely close at the low end of the 2013-target range.