16% money supply growth still healthy – BSP

The growth in money supply – which hit a six-year high last month – remains at a comfortable level, enough for an expanding Philippine economy to absorb without the risk of overheating, officials said.

“I don’t think an M3 growth of 16 percent could necessarily lead to higher inflation or overheating,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo said in a text message.

“We believe overheating is a remote issue because the potential capacity of the economy has gone up,” he added.

Domestic liquidity – as measured by M3 – grew by 16.3 percent in the five months to May, the fastest in nearly six years or since July 2007 when it hit 19.2 percent. This helped push bank loans up.

The BSP has been trying to boost money supply by keeping interest rates low and slashing the return it offers to trillions of funds parked on special deposit accounts three times this year.

While more funds in the financial system ensures adequate financing for projects, these also could result into overheating – a scenario when because of too much money in the system, inflation skyrockets and dents growth.

But for Guinigundo, faster money supply growth, not seen for years, should not be a cause of worry and instead be a welcome development for economic activities which could get necessary funding.

More economic activity, in turn, could support “robust” economic growth in the coming quarters, he said. The local economy expanded by 7.8 percent in the first three months, beating market expectations.

“There is no evidence yet that the economy is beginning to over expand... In addition, productivity has improved while efficiency appears to have also climbed in recent years,” Guinigundo pointed out.

He also said that the relationship between money supply and inflation has “weakened” as proven by consumer prices rising only by an average of three percent as of May.

The BSP has a three – to five-percent inflation target this year.

For his part, Lorenzo Tan, president of the Bankers Association of the Philippines, said money supply level continues to be “safe” and that the uptick in May was just driven by seasonal factors.

“We need to understand that we had the elections in May. So the supply of money would naturally spike up,” Tan said in a separate text message.

“It should be temporary. Of course, the BSP is watchful and they will be ahead of the curve,” he added.