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Domestic Liquidity Growth Accelerates in June

07.31.2013

Domestic liquidity (M3) grew by 20.3 percent year-on-year (y-o-y) in June to reach     P5.7 trillion. The increase was faster than the 16.4 percent (revised) expansion recorded in May. On a month-on-month (m-o-m) basis, seasonally-adjusted M3 also expanded at a faster pace of  4.1 percent compared to the 2.9 percent (revised) m-o-m growth in May.

Money supply growth was driven largely by the sustained expansion in net domestic assets (NDA). NDA increased by 30.5 percent y-o-y in June from 28.7 percent (revised) in May due to the continued increase in credits to the private sector (by 14.4 percent). This, in turn, reflected the sustained growth in bank lending to help finance economic activity. Similarly, credits to the public sector grew by 3.8 percent in June, largely as a result of the increase in investments in National Government securities. The increase in the balance of the net other items account (due, in part, to the lower level of SDA placements by trust entities) also contributed to faster liquidity growth.

The growth in net foreign assets (NFA) was likewise faster at 5.5 percent y-o-y in June, compared to 0.9 percent in May. The BSP’s NFA position increased on the back of steady foreign exchange inflows from remittances and BPO receipts. Meanwhile, the NFA of banks declined further as banks’ foreign liabilities continued to increase due mainly to higher placements and deposits of foreign banks with their local branches and other banks, while their foreign assets continued to decrease due to the decline in their loan receivables from and deposits with foreign banks.

Latest baseline forecasts indicate that, with the current stronger pace of growth in domestic liquidity, inflation is expected to remain manageable over the policy horizon. This is because the economy's absorptive capacity appears to be improving, even as domestic demand has continued to expand.  Credit dynamics are therefore well-positioned to provide financing for economic growth. Going forward, the BSP will continue to assess the medium-term impact of such monetary growth on the inflation outlook. The BSP remains prepared to deploy appropriate measures as necessary to ensure that liquidity conditions continue to be in line with the BSP's objective of maintaining price and financial stability conducive to sustainable economic growth.

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