Double-digit rise in liquidity projected

MANILA, Philippines — Domestic liquidity is projected to increase at double-digit rates starting next year to support the country’s funding requirements, according to the Bangko Sentral ng Pilipinas (BSP).

The higher expansion in money supply or M3 in 2023 and 2024 will be achieved despite the ongoing tightening cycle by the Monetary Board.

“Domestic liquidity (M3) is projected to increase at double-digit rates in 2023 and 2024,” the BSP said in its Monetary Policy Report for August 2022.

Latest data from the BSP showed domestic liquidity rose by 6.9 percent to about P15.39 trillion in June from P14.4 trillion in the same month last year.

According to the central bank, domestic financial conditions remain supportive of economic recovery.

The BSP said preliminary data showed domestic liquidity remained unchanged at 6.9 percent in June, while bank lending grew at a faster pace of 12 percent in June form 10.7 percent in May.

The Philippines posted a gross domestic product growth of 7.8 percent in the first half despite the disappointing performance of 7.4 percent in the second quarter from the 8.2 percent in the first quarter.

This was slightly above the 6.5 to 7.5 percent target set by the Cabinet-level Development Budget Coordination Committee.

Excess liquidity weakens the monetary policy transmission mechanism and thus the ability of monetary authorities to influence demand conditions in the economy.

As of Aug. 2, the total outstanding amount absorbed in the BSP liquidity facilities stood at about P1.65 trillion, higher than the total placements of P1.3 trillion recorded in pre-Interest Rate Corridor period as of May 25, 2016 and nearly two times the pre-pandemic end-2019 level of P854 billion.

“The bulk of the BSP’s monetary operations to absorb excess liquidity had been conducted through the BSP securities facility, comprising about 36.3 percent of total or about P599.3 billion,” the central bank said.

Likewise, placements in the term deposit facility accounted for 25.2 percent or P416.6 billion, overnight deposit facility at 20 percent or P329.2 billion, and overnight reverse repurchase facility at 18.5 percent or P305 billion.

These facilities help absorb excess liquidity and prevent stoking inflationary pressures or risks to financial stability.

“With the use of more active instruments for liquidity absorption, the BSP had found some leeway to reduce its reliance on reserve requirements for managing liquidity conditions,” the BSP added.

The BSP remains committed to reducing the reserve requirement ratio (RRR) – the level of deposits banks are required to keep with the central bank – to single-digit levels by 2023.

The regulator has slashed the RRR for big banks to 12 percent from a high of 18 percent in 2018 to free up more funds into the financial system to boost the economy.