Philippine money supply in September jumped 13.5 percent from a year earlier from a 9.8 percent growth in August partly due to higher borrowings both by the government and the private sector, the Bangko Sentral ng Pilipinas (BSP) said on Wednesday. 

BSP said it continues to closely watch liquidity conditions to ensure the financing needs of the economy are met and the local financial system is not adversely affected by the current credit squeeze in global financial markets. 

Domestic liquidity is one of the critical indicators that monetary officials watch since it has a direct and wide-ranging impact on inflation rate. Uncontrolled expansion in money supply could trigger a rise in the prices of basic commodities. 

Controlling the amount of liquidity in the system is the BSP's primary tool for controlling inflation.

Last year, the expansion of money supply, also referred to as domestic liquidity, was recorded at 11.5 percent. At the time, the BSP was in the midst of a tightening cycle because money supply growth had risen to as high as 27 percent.

This year, BSP has been tightening domestic money supply because of rising inflation, although it has been loosening its grip slowly. Earlier this year, the central bank closed three of six special deposit account (SDA) windows.

BSP officer in charge Armando Suratos said the expansion in domestic liquidity was due to the build-up of both net domestic and foreign assets.

Suratos said the net domestic assets grew by 10.8 percent as the growth in credit to the private sector was sustained.  

Credit extended to the public sector grew moderately by 4 percent on the back of increased lending to the National Government.  

The BSP said credit to local government units and other public entities also increased.  

On the other hand, Suratos said net foreign assets grew by 11.1 percent from 5.4 percent in August as as the central bank's own foreign assets increased. Those held by banks, on the other hand, declined by 10.1 percent following lower investments in foreign securities.

Domestic liquidity growth has been under tight watch since last year when a strong dollar surge pushed it up to the level that required the central bank to start mopping up excess liquidity.

This year, however, the BSP said domestic liquidity has been slowing down, taking away at least one factor that could have aggravated the country's rising inflation rate.

But surging oil prices have fuelled inflation and the BSP has been raising its policy rates in increments, announcing a 25-point hike in June which was followed by a 50-point hike in July and finally another 25-point hike in August. 

The BSP said domestic money supply could grow by an average of 14 to 15 percent this year under its old reporting system, without creating these inflationary pressures and officials said the current money supply level was enough to support growth.

But the BSP said it had to review its assumption based on the new reporting system to determine the appropriate domestic liquidity growth rate for the year.