The Monetary Board decided today to reduce by 25 basis points the BSP’s key policy interest rates to 5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 7 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts were also reduced accordingly. This is the fourth consecutive reduction in policy rates since October 2007.
In its assessment of macroeconomic conditions, the Monetary Board noted that the latest inflation forecasts indicate that inflation would fall within the 4.0 percent + 1 percentage point target range in 2008 and the 3.5 + 1 percentage point target range in 2009. Demand indicators continue to show some strengthening, indicating manageable price pressures going forward. Inflation expectations remain well anchored and liquidity growth has been decelerating on account of liquidity management measures adopted earlier in 2007. Core inflation, a measure of the underlying trend in consumer prices, remained lower than headline inflation in December.
The Monetary Board noted that the volatility in world oil prices and higher commodity prices remain the key risks to the inflation outlook. The firm peso, however, is expected to temper the impact of higher import costs on domestic prices. Slower economic activity in the US as well as globally could also moderate price pressures coming from imported oil and food. In addition, the reduction of the oil import tariff effective February is expected to reduce pump prices of petroleum products.
The monetary authorities remain committed to maintaining price stability and will continue to closely monitor evolving monetary and financial conditions, particularly the risks associated with the inflation outlook.