The Monetary Board decided today that it will keep its policy rates at their present levels: the overnight RRP and RP rates at 10.00 percent and 12.25 percent, respectively, after implementing three policy rate hikes for a cumulative increase of 125 basis points since the beginning of the year.
Earlier, the market’s anticipation of the 50-basis point increase in the FED funds rate last May 16 has resulted in increased volatility of regional currencies, including the peso. This, together with higher demand for dollars following stronger signs of economic recovery and the social tension in Mindanao and more recently in Metro Manila, have contributed to the recent weakening of the peso.
Notwithstanding the volatility in the foreign exchange market, we decided to adopt a neutral policy stance for the time being. We are convinced that the recent movements in the exchange rate are largely sentiment-driven and are not validated by real factors as the country’s macro fundamentals have remained strong. We are of the view that the volatility in the peso-dollar rate is temporary and that the market will soon stabilize with the expected start of the negotiation for peace in Mindanao.
Our assessment shows that the 100-basis point cumulative increase in the BSP’s policy rates effected on the 17th and 19th of may have already sufficiently addressed the narrowing differential between domestic and foreign interest rates following the U.S. FED’s successive rate hikes and concerns of a potential increase in the country’s inflation rate.
Thus, implementing another upward adjustment in the BSP’s policy rates at this point may instead impinge on the economic recovery process. Leading indicators of demand such as the Monthly Integrated Survey of Selected Industries (MISSI), investment growth, car sales, appliance sales, and electricity sales continue to reflect a recovery in the domestic economy. Based on initial estimates of the BSP, another policy rate adjustment at this point may already generate negative impact on output growth.
The inflation rate is expected to stay well within the government’s target range of 5.0-6.0 percent in 2000. We will continue to closely monitor developments in both the domestic and external fronts and policy rates will be reviewed and adjusted promptly as the situation may require.