Phl faces inflationary threat: DBS points to rapid growth in money supply

MANILA, Philippines - A rapid growth in money supply – not seen since before the Asian financial crisis of 1997 – could finance economic activity, but an investment bank warned it could also be a threat in the form of rising inflation.

“Price pressures have been low over the past six months as commodity prices stayed depressed amid lackluster economic growth,” DBS economist Eugene Leow said in a report yesterday.

“Beyond the immediate few quarters, however, there are some early signs that inflation may accelerate,” he added.

Inflation hit 2.8 percent in June and Leow expects it to have steadied last month. As of the first semester, consumer price increases averaged 2.9 percent, slightly below the central bank’s three- to five-percent target for the year.

The below-target inflation has prompted the Bangko Sentral ng Pilipinas (BSP) to allow more liquidity to flow into the system by keeping policy rates at record-lows and slashing returns in special deposit accounts (SDA).

According to Leow, the lower SDA rate of two percent, earned by parked funds in the BSP for a maximum of one month, has contributed to the money supply growth of 20.3 percent as of the first semester.

“More stringent directive” to remove investment management accounts (IMA) – funds held by trust entities for singular individuals – also drove roughly P200 billion out of the facility from April to June.

SDA deposits totaled P1.79 trillion as of July 19, down from its peak of P1.983 trillion last April 15, central bank data showed.

The amount is seen to decrease even further as it still has not captured the IMAs that flowed out of the system – 30 percent of outstanding placements – last July 31.

Leow said with the world economy still weak, global prices, such as that of oil, are not likely to overshoot, helping keep their local counterparts “muted” for now. 

The strong Philippine economic growth, which beat expectations at 7.8 percent in the first quarter, is not expected to create “demand-pull” inflation.

However, risks abound with the continued rise in money supply owing to SDA reforms. For instance, by December, more funds are seen in the financial system with the complete phase-out of IMAs.