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 is of the view that the present monetary policy settings remain appropriate to prevailing demand and supply-side conditions. Latest forecasts continue to show a generally declining path for inflation until next year, with average inflation for 2007 expected to settle within the 4-5 percent target in the absence of further adverse shocks. The stronger peso should help keep down the domestic prices of imported commodities, particularly crude oil, while the favorable outlook for agriculture should help ensure stable food prices. Meanwhile, the continued easing of core inflation suggests minimal demand-based inflation pressures. Aggregate demand, to date, has been largely driven by consumer spending.
However, the Monetary Board also recognized that the inflation outlook remained at risk from energy-related cost-side pressures. These pressures stem mainly from the vulnerability of world oil prices to supply constraints and geopolitical disruptions. Potential shifts in the public’s inflation expectations will thus continue to require monitoring. The possibility of such shifts does not appear to be a pressing concern at the moment, but could become a risk in the future if cost pressures escalate more sharply than expected. This assessment applies equally to potential second-round pressures linked to wage-setting behavior. Liquidity conditions will also continue to be closely monitored in view of their potential impact on inflation.
The Monetary Board remains strongly committed to achieving the inflation targets for the medium term and stands ready to act against emerging risks to the outlook for inflation and to inflation expectations.