MANILA MARCH 12, 2007 (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) said the economy could support domestic liquidity growth of between 20 percent to 22 percent for the whole year but any faster than this could fuel inflationary pressures that might require a shift in monetary settings.

Official macroeconomic targets and projections had been based on a projected 14 percent domestic liquidity growth for the whole year but Tetangco said the BSPís inflation target would still be met at the 20 percent to 22 percent growth rate.

Even given the growth in money supply, BSP Governor Amando M. Tetangco Jr. said the forecast inflation was within the target and possibly even lower.

"We have some buffer," Tetangco said.

He said the BSP studied several scenarios including models that used very high liquidity growth rate and the attendant impact on inflation.

"Weíve determined that a 20 percent to 22 percent growth in domestic liquidity for the rest of the year would still keep inflation within target," Tetangco said.

He said that even with the elections in May, the impact on inflation was expected to be minimal. "What changes during election period, based on historical data, is the velocity of money," he said. "The volume of money and general commodity prices have tended to remain steady."

The BSPís confidence about meeting its inflation target had prompted the policy-setting Monetary Board to keep all its policy settings unchanged when it held its meeting Thursday amid speculations that monetary officials were ready for some easing.

Tetangco explained that although the inflation rate was projected to stay low at least for the first half of the year, the MB wanted to observe how domestic liquidity would behave in the coming months.

"We see no immediate threat to our inflation target but we will see," he said.

Although the current money supply growth appeared to not worry monetary officials, the BSP had projected that a prolonged growth rate approaching 30 percent, however, would be inflationary especially if the growth rate accelerated even more and over a long period.

Tetangco said the increasing depth of the economy had resulted in greater monetization and increase in absorptive capacity over the past year.

"There is greater absorptive capacity such that expansion in liquidity does not translate into higher inflation," said BSP Deputy Governor Diwa Guinigundo. "This capacity has allowed us to accommodate expansion in liquidity without it becoming inflationary."

Chief News Editor: Sol Jose Vanzi

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