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 tiering system on bank placements with the BSP was also kept in place, including those on SDA placements by trust entities.
The Monetary Board assessed that the outlook for inflation over the policy horizon continues to be benign, due mainly to easing supply-side pressures, moderate demand pressures and well-contained inflation expectations. Ample supply of major food items, the subsiding base effect of the RVAT on the CPI, and the strengthening of the peso have contributed to the continued downtrend in inflation.
However, sustained growth in domestic liquidity remains a key policy concern. Domestic liquidity expansion has remained strong in the past several months and although current inflation has continued to decelerate, a prolonged surge in liquidity could eventually pose risks to future inflation. In addition, volatility in oil prices remains a risk to the inflation outlook, given the limited production capacity and the threat of possible geopolitical disruptions. The possibility of additional wage adjustments also provides some upside risks.
The implementation of the new monetary measures beginning 10 May 2007 is expected to help siphon off additional liquidity in the system and thereby exert a mitigating impact on future inflation. While the initial results have been encouraging, the recent policy moves need to be given more time to fully work their way through the financial system and achieve their objective of keeping domestic liquidity growth down to a more modest pace. This will also allow further assessment of the liquidity impact of the continued strong foreign exchange inflows into the economy.
For the next several months, the BSP will closely monitor the impact of the new measures on monetary conditions which will serve as basis for subsequent monetary policy actions to ensure that the benign inflation environment is maintained over the policy horizon.