Domestic liquidity or M3 grew at a slower pace of 8.3 percent in July 2011 from 11.4 percent in June 2011 to reach P4.2 trillion. On a monthly basis, seasonally-adjusted M3 contracted by 1.0 percent from a growth of 2.4 percent (revised) in the previous month.
Fueling the expansion in domestic liquidity is the higher growth in net foreign assets (NFA) at 17.5 percent in July from 14.8 percent in June. The BSP's NFA position grew by 36.5 percent due largely to sustained foreign exchange inflows from overseas Filipino remittances as well as portfolio and direct investments. Meanwhile, the NFA of banks continued to decline by 96.8 percent in July compared to the 83.7 percent contraction in June as their foreign liabilities increased while their foreign assets declined. Banks' foreign liabilities rose with the increase in bills payables and higher placements made by the head offices/other branches of foreign banks with their Philippine branches. Meanwhile, the decrease in banks' foreign assets was due in part to the contraction in loan receivables from foreign banks.
Net domestic assets (NDA), meanwhile, contracted further by 6.3 percent in July from a marginal decline in the previous month given the faster expansion in the net other items account (which includes, among other things, revaluation and capital and reserve accounts as well as SDA placements of trust entities). By contrast, net domestic credits continued to expand by 7.2 percent with the sustained increase in credits extended to the private sector at 14.0 percent from 13.8 percent in the previous month. This trend is in line with the continued strong growth of bank lending to the productive sectors of the economy. Meanwhile, credits extended to the public sector decreased further due mainly to the decline in credits extended to the National Government (NG) given its improved cash position as reflected in the continued increase in NG deposits with the BSP and other banks during the month.
The slowdown in the growth of money demand during the month reflects the impact of recent policy actions of the BSP to curb potential inflation pressures. Going forward, the BSP will continue to closely monitor monetary conditions to ensure that the amount of liquidity in the financial system remains in line with the BSP's price and financial stability objectives.