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Monetary Board Maintains Policy Rates, Fine Tunes SDA Facility


At its meeting today, the Monetary Board decided to keep the BSP’s key policy interest rates at 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 and RPs were also left unchanged.

In its assessment, the Monetary Board observed that the outlook for inflation in 2008 is influenced by elevated prices of global food and energy products, which could be largely transitory.  Since the key risks to the outlook for the remainder of the year are linked to imported oil and non-oil commodity prices, the Monetary Board concluded that these risks cannot be effectively addressed by monetary policy. The supply-side developments are best addressed by non-monetary measures, including by keeping a close watch on the trends in the global commodities market, by coordinating closely with concerned government agencies involved in monitoring prices and ensuring the adequate supply of commodities, and by careful communication of the inflation outlook.   

In deciding to keep the BSP’s key policy rates steady, the Monetary Board noted that the emerging inflation outlook for 2009 is consistent with the 3.5 percent  ( + 1 percentage point) target for that year, even as external supply shocks pose risks to the 4 percent ( + 1 percentage point) target in 2008.  Given the lag in the impact of monetary policy, any policy move at this time is expected to affect the inflation outcome for 2009.

The Monetary Board also decided to implement immediately the following refinements in the Special Deposit Account (SDA) facility: (1) the closure of existing windows for the two-, three-, and six-month tenors; and (2) the reduction of the interest rates on the remaining tenors.  This will ensure that banks’ loanable funds remain adequate to meet the requirements of the expanding economy.  Encouraging banks to lend more will help sustain the strengthening of most demand indicators and will be consistent with the forecast for continued strong economic activity. 

The outlook for inflation, which is seen to be manageable over the BSP’s two-year policy horizon, supports the need for caution in monetary policy.  The BSP will continue to be attentive to possible second-round effects from supply shocks and to ensure that inflation expectations are well-anchored in order to achieve the Government’s inflation targets.

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