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BSP Maintains Key Policy Rates

08.10.2006

At its meeting today, the Monetary Board decided to maintain the BSP’s key policy interest rates at 7.5 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.75 percent for the overnight lending or repurchase (RP) rate.

The Monetary Board indicated that the evidence on output and inflation supports a steady policy setting.  Latest BSP forecasts continue to show a decelerating path for inflation over the policy horizon, with the likelihood that the target headline inflation rate in 2007 of 4-5 percent will be achieved, in the absence of additional cost-push shocks. The sustained decline in core inflation also implies reduced generalized pressures on consumer prices. Moderate improvements in demand indicators and weak credit activity also suggest a scenario of limited demand-based price pressures. 

Nevertheless, the Monetary Board considered that the balance of risks to the future path of inflation remains tilted toward the upside, mainly on account of the outlook of higher oil prices. The prospect of sustained high international oil prices, along with associated adjustments in power and possibly transport costs, implies a continuing environment of supply-side pressures. Meanwhile, more than ample liquidity in the banking system can also be a source of concern.

Given these considerations, the Monetary Board recognized the need to remain focused on managing the risks to inflation expectations, assessing the likelihood of second-round effects, and closely monitoring developments in liquidity conditions.

The Monetary Board remains strongly committed to achieving the inflation target for 2007 and stands ready to act against emerging risks to the outlook for inflation and to inflation expectations.

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