Liquidity, credit growth won’t create asset bubble – BSP

MANILA, Philippines - The expansion of domestic liquidity and growth in credit won’t create any asset bubble that may disrupt the financial system, the Bangko Sentral ng Pilipinas said.

BSP Governor Amando M. Tetangco Jr. said the central bank is not concerned with the record growth in domestic liquidity nor the continued rise in credit as these are needed to support economic activities in the country.

“Our assessment is that both liquidity and credit are rising consistent with the growth in the economy and financial deepening,” Tetangco said.

M3, the broadest measure of money in the financial system, expanded by 30.1 percent to P6.03 trillion in July, central bank data showed. This is the fastest pace of domestic liquidity growth since December 2002.

Bank lending, meanwhile, grew at a steady pace of 12.3 percent to P3.34 trillion in July amid sustained demand for loans from both businesses and households.

“Strong liquidity and credit growth feeds the economy’s growth potential. Structural reform milestones that began in the early 1990s and 2000s and continue to gather stronger pace today have translated to productivity gains over time, as reflected in higher potential output growth. If the current investment-led growth and institutional reforms are sustained, a five-to seven-percent potential output growth for the medium-term is highly feasible,” Tetangco said.

He noted that there is sufficient liquidity in the system to fund economic activities and further support growth.

Domestic liquidity in July was driven partly by funds flushed out of the central bank’s Special Deposit Accounts (SDA). The BSP has been adjusting measures for investments in said facility in order for funds to be used in other activities that will support economic growth instead of being parked in SDAs.

The central bank has cut the interest rates on SDAs by 150 basis points this year to two percent, and has ordered the removal of singular investment management accounts (IMA) in the facility by end-July. The remaining 70 percent of IMA should be phased out by end-November.

Tetangco stressed that the market should not be concerned with the 30-percent growth in domestic liquidity as the BSP has already prepared for an uptick in M3 following adjustments in the SDA facility.

“The BSP has always anticipated there will be some liquidity growth after the funds under  SDA-IMA are released. That was, after all, the game plan,” Tetangco said.

He further pointed out “If the concern is whether the liquidity will fuel an asset bubble, the answer again is no.”

Moreover, Tetangco said that the high growth in liquidity that may be seen in the following months as funds continue to be flushed out of the SDA is only seen to be temporary.

“Our anticipation is that the period of high liquidity growth coming from SDA-IMA will not persist,” Tetangco said.

He added, “We fine-tuned the SDA operations so the funds could find more productive homes in industry, manufacturing and other sectors of the economy.”