The Monetary Board decided to keep steady the BSP’s policy interest rates at their current levels. The overnight RRP and RP rates were maintained at 11.0 percent and 13.25 percent, respectively. The monetary authorities feel that an increase in domestic interest rates could dampen economic growth, which is still in the recovery phase. Moreover, higher interest rates could increase corporate financial difficulties and put additional pressure on the quality of banks’ loan portfolios.
The BSP considers that the increase in policy rates on 11 September 2000 has been sufficient in addressing the narrowing differential between foreign and domestic interest rates. Prior to the September 11 increase in policy rates, the differential between the domestic 91-day t-bill rate and the interest rate on FCDU dollar deposit rates of the same maturity, net of taxes, narrowed to around 225 basis points in August 2000 from about 250 basis points in march 2000. After the rate hike, this differential has widened to about 243 basis points.
The BSP believes that under a forward-looking monetary policy framework which is consistent with the planned shift to inflation targeting next year, policy rates adjustments should be aimed not at stabilizing the exchange rate but mainly at addressing emerging inflationary pressures. The BSP also believes that the economy is still recovering and is, therefore, far from overheating. Inflation for the period January-September 2000 remains at a low level, registering an average year-on-year inflation rate of 3.8 percent, well below the 5.0-6.0 percent target for the year. Likewise, at the current levels of the BSP’s policy rates, core inflation—the measure of inflation that excludes the impact of short-run temporary disturbances—is forecasted to decline in the last two quarters of 2001, the period during which monetary policy action at the present time is expected to have an impact.
In a move to ease pressures on the foreign exchange market, the Monetary Board decided on 4 October 2000 to raise liquidity reserves of banks (excluding rural banks) and quasi-banks by 2 percentage points effective 13 October 2000. The new measure was aimed at siphoning off excess liquidity in the banking system that has contributed to pressure against the peso. The increase in liquidity reserves is not expected to materially affect the intermediation cost of banks because these reserves will earn market interest rates. Hence, bank lending rates are not expected to rise.
The BSP will continue to pursue measures to create an enabling environment to consolidate growth while maintaining price stability and an orderly foreign exchange market.