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BSP Maintains Neutral Policy Stance Via Twin Moves


At its meeting today, the Monetary Board decided to maintain a neutral monetary policy stance by implementing two complementary moves.  Effective Friday, 13 July 2007, the tiering system on placements with the BSP will be lifted and the BSP’s key policy interest rates will be adjusted to 6.0 percent for the overnight borrowing or reverse repurchase (RRP) rate and 8.0 percent for the overnight lending or repurchase (RP) rate.   The removal of the tiering scheme and the adjustment in interest rates will also apply to placements in the special deposit account (SDA) facility of the BSP.

This policy stance—which is neutral relative to future inflation and output—is consistent with the forward-looking orientation of inflation targeting, considering the low actual inflation and, more importantly, the benign inflation outlook over the policy horizon.  The latest BSP forecasts continue to indicate that inflation is likely to fall below the 4.0–5.0 percent target range in 2007 and stay within the 4.0 percent ± 1.0 percentage point target in 2008. 

In its assessment of economic conditions, the Monetary Board noted that recent data suggest that the additional liquidity management measures implemented in early May 2007 have begun to exert the desired cooling effect on liquidity conditions.  Meanwhile, there are indications that the tiering scheme that has been in effect for the past eight months has had a beneficial impact on bank lending to the productive sectors of the economy.   At the same time, the Monetary Board observed that the continued broadening of financial markets means that non-bank sources of financing are becoming increasingly available to the corporate sector, therefore reducing the reliance on bank lending.  

The Monetary Board believes that the neutral stance of monetary policy is appropriate given moderate demand pressures, favorable supply conditions and manageable inflation expectations.  Moreover, the Monetary Board considers that neutrality will provide greater flexibility to the monetary authorities in the absence of a clearer direction on potential risks to the inflation outlook, such as liquidity, wage pressures and oil prices.    

The BSP will continue to be closely attentive to price developments and related risks with a view to formulating pre-emptive monetary policy that will safeguard price stability.  This will ensure that a low-inflation environment supportive of healthy and strong economic growth is sustained over the policy horizon.

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