Growth in the supply of money in the financial system, also called M3 by economists, slowed significantly in September to only 16.2 percent from 18.3 percent in August, the Bangko Sentral ng Pilipinas (BSP) said on Friday.
The deceleration capped seven months of carefully calculated monetary-policy adjustments designed to ensure against unwarranted surges in inflation, and by this measure send a very clear signal that target local output growth, measured as the gross domestic product (GDP), averaging 7 percent this year, is attained.
According to the BSP, the M3 growth of only 16.2 percent in September was the slowest the monetary aggregate has measured since this grew by 15.8 percent in May 2013.
In absolute terms, money supply totaled P7.2 trillion in September, some P1 trillion lower than the year-ago aggregate.
This indicated success in moderating the continued, but unwarranted growth in money supply that could wreck the carefully laid out plan by the monetary authorities to boost demand and support growth.
Unwarranted money-supply levels result to too much money chasing after too few or the same amount of services and goods and a perfect recipe for runaway inflation.
The seven-man Monetary Board, headed by BSP Governor Amando M. Tetangco Jr. started in March this year a series of events designed to supply the $270-billion Philippine economy with just enough money in the system to allow growth to happen minus the hazard of inflation.
First, the monetary authorities ramped up the banks’ deposit reserves a full percentage point higher in March, the full impact of which was felt the following April when the measure became effective.
The deposit reserve hike effectively denied the banks the peso liquidity they need to flood the financial system with potentially inflationary liquidity. The BSP imposed another 1-percentage-point deposit reserve hike in May that sapped billions of pesos more in so-called excess liquidity from the system.
In its desire to deny the system with any more residual sources of inflation, the Monetary Board raised the interest rate on its special deposits facility to capture billions more in excess liquidity still in circulation and into the vaults of the central bank ,where they may no longer do financial mischief. The special deposit account (SDA) window of the BSP became a magnet for funds seeking virtually risk-free opportunities for investments as the rates were raised in June, July and September this year.
The banks’ deposit reserve hikes and the SDA adjustments were on top of the adjustments in the rate at which the central bank borrows from or lends to banks overnight.
The central bank acknowledged the deceleration in M3 growth was brought about by the series of tightening measures during the year.
“Domestic liquidity growth is expected to further moderate to levels consistent with domestic demand, as previous monetary adjustments continue to work their way through the economy,” the central bank said.
The BSP also said that sustained money-supply growth during the period was due to sustained demand for credit in the domestic economy.
In a separate report on Friday, the central bank said bank lending continued to expand in September as loans for production activities increased.
In particular, outstanding loans of large banks in September grew 20.5 percent, slightly faster than the revised 20.1 percent reported the previous month.
Loans for production activities set the pace of growth for the month, equal to 80 percent of total loan portfolio during the period.
The volume of production loans expanded by 18.7 percent in September, from 19 percent in August.
“The rise in production loans was driven primarily by increased lending to the following sectors: wholesale and retail trade, real estate, renting and business services, manufacturing, electricity, gas and water, and financial intermediation. Bank lending to other sector also rose during the month except for public administration and defense, which declined by 1.8 percent,” the central bank said.