Money supply rises 12.7% ahead of IRC implementation

MANILA, Philippines – Liquidity in the financial system continued to pick up in April ahead of the formal shift in its monetary operations to an interest rate corridor (IRC) system this week.

Data from the Bangko Sentral ng Pilipinas (BSP) showed money supply expanded 12.7 percent to P8.56 trillion in end-April from P7.59 trillion in end-April last year.

BSP Governor Amando Tetangco Jr. said in a statement the growth in money supply in April was faster than the 11.7-percent expansion recorded in March.

“Money supply continued to expand due largely to sustained demand for credit,” Tetangco said.

Tetangco said domestic claims grew 18.4 percent in April from the revised 15.4 percent in March as credits to the private sector increased at a faster pace relative to the previous month.

Bank lending grew faster at 15.6 percent in April from 14.8 percent in March amid strong demand from corporate and retail borrowers.

“The sustained expansion of M3 during the month indicates that money supply remains sufficient to support economic growth,” he said.

Data showed net public sector credit surged 42 percent in April from the revised 33.6 percent in March, while net foreign assets in peso terms grew eight percent from the revised 5.8 percent.

The BSP is set to offer P30 billion worth of term deposits on June 8 as part of the shift to the IRC system. It would auction P10 billion worth of seven-day and P20 billion worth of 28-day term deposits at the maiden auction of term deposits.

Aside from the term deposit auction facility, the IRC system would also consist of the overnight lending facility and the overnight deposit facility. The interest rates for the standing liquidity facilities form the upper and lower bound of the corridor while the overnight reverse repurchase is set at the middle of the corridor.

The overnight lending facility would replace the repurchase window while the overnight deposit facility would replace the special deposit account (SDA) window.

On the other hand, the reverse repurchase facility would be modified to a purely overnight reverse repurchase.

In addition, the term deposit auction facility would serve as the main tool for absorbing liquidity and would promote the establishment of benchmarks for short-term interest rates.

Increased activity and better pricing in money market rates, in turn, are seen to help add depth to money markets and help develop the domestic capital market.

Earlier, the BSP announced the adjustment of interest rates for these facilities starting June 3. The rate for the overnight lending facility was set at 3.5 percent instead of six percent while that of the overnight reverse repurchase rate was set at three percent instead of four percent.

The rate for the overnight deposit facility was unchanged at 2.5 percent or same as the SDA rate.

The BSP clarified the shift to the IRC system does not represent a change in the BSP’s stance of monetary policy.