RECENT  LIQUIDITY  SURGE  NOT  INFLATIONARY  -  BSP

MANILA, DECEMBER 2, 2006
(STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) expressed optimism that the recent surge in domestic liquidity wonít pose a serious threat to the governmentís inflation target.

The growth in the domestic money supply has been a growing concern among monetary officials but the BSP said it need not cause immediate concern.

Strong dollar inflows particularly from overseas Filipino workers (OFWs) have been releasing huge amounts of peso into the system despite the appreciation of the peso against the dollar.

In October, domestic liquidity growth was recorded at 16 percent, the highest so far this year.

According to BSP Deputy Governor Diwa Guiningundo, however, the impact of domestic liquidity on inflation had weakened as capital markets became more sophisticated and deeper.

"Normally the appropriate level of liquidity would be related to the kind of inflation you would expect. Beyond that, people used to say it would be automatically inflationary," Guinigundo explained. "But over the years, the impact of liquidity has been somewhat weaker relative to the 1990s."

Guinigundo said the global economy has since become deeper, with increasingly sophisticated investment instruments that could siphon liquidity out of the system.

"There are lots of structured financial products in the market now, including plastic money," he said.

Moreover, Guinigundo said central banks around the world have established credibility to such an extent that even the threat of monetary action could get the market in line.

"Having said that, it doesnít mean we are not concerned with domestic liquidity. We are," he said. "Thatís why we continue to monitor domestic liquidity. It will continue to be given importance in deciding the monetary policy stance of the BSP."

The local money supply grew by 16.1 percent in October, bolstering fears that a strong dollar inflow could stoke inflationary pressures.

The BSP said the expansion in liquidity continued to be driven by strong foreign exchange inflows from OFW remittances and portfolio investments.

"These inflows have allowed the BSP and banks to build up their foreign assets and prepay their foreign obligations," the BSP said.


Chief News Editor: Sol Jose Vanzi

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