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BSP Maintains Key Policy Rates

01.13.2005

At its meeting today, the Monetary Board decided to keep the BSP’s key policy interest rates unchanged at 6.75 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.0 percent for the overnight lending or repurchase (RP) rate.

The Monetary Board believes that the outlook for inflation and other economic evidence continue to support the argument for keeping present policy settings unchanged.  It noted that while current inflation is on the rise, future inflation is likely to be on a downtrend, due mainly to easing conditions in the world oil market.  BSP forecasts indicate that this year’s average inflation (using the 2000 CPI-based series) will exceed the 4.0-5.0 percent full-year target, with monthly inflation expected to begin its downtrend at the end of the first quarter and reach 5.0 percent by the fourth quarter of the year.  Inflation is then seen to stabilize within the target range of 4.0-5.0 percent throughout 2006.

The Monetary Board also noted that the expected path of inflation continues to be driven mainly by supply-side pressures, the direct effects of which cannot be addressed appropriately by monetary policy.  These pressures, the authorities believe, are best addressed by non-monetary intervention that would facilitate production, timely importation, distribution, and delivery of key commodities.  Accordingly, the BSP continues to articulate its support for the efforts of concerned government agencies against supply-side risks to prices.  These include, among other things, the intervention measures of the Department of Agriculture to enhance agricultural production and rehabilitate typhoon-damaged areas, which would help ensure adequate food supply and temper food price increases

At the same time, the Monetary Board acknowledges that the growth in domestic demand, as evidenced by the strong growth in consumption spending and merchandise trade, continues to be accompanied by indications of slack in the economy, particularly in terms of unemployment and lending activity. The outlook for economic activity is also partly dampened by evidence of reduced business and consumer optimism (as shown in the latest Business and Consumer Expectations Surveys by the BSP), as well as slower global economic activity.  The chief risk to output conditions, therefore, is that of a slower pace of activity, particularly in view of the output effects of recent weather disturbances and natural calamities.  On the other hand, the exchange rate is considered to be broadly stable and prevailing interest rate differentials (between the Philippine 91-day T-bill rate and the US 90-day T-bill and 90-day LIBOR rates) comfortable enough not to feed significantly into inflation and inflation expectations.

Given such conditions, the Monetary Board concluded that the appropriate course of action would be to leave the present settings for monetary policy unchanged.  However, the Monetary Board remains firmly committed to minimizing the unfavorable effects of ongoing supply shocks on inflation and economic growth, and therefore reasserts its continued readiness to act in order to prevent these supply shocks from having second-round effects on the public’s inflation expectations and on wage and price-setting behavior.  At the same time, the Monetary Board also continues to voice its support for government intervention measures to quell the supply-side risks to prices.

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