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The Monetary Board Hikes Policy Rates by 50 Basis Points

07.17.2008

At its meeting today, the Monetary Board decided to increase by 50 basis points the BSP’s key policy interest rates to 5.75 percent for the overnight borrowing or reverse repurchase (RRP) facility and 7.75 percent for the overnight lending or repurchase (RP) facility.  The interest rates on term RRPs, RPs, and SDAs were also raised accordingly.

Inflation control is the foremost priority of the BSP, in accordance with its mandate.  The Monetary Board, in its assessment of price conditions, noted that concurrent and interrelated shocks to the economy—such as the persistent surge in oil prices and spikes in commodity prices—have contributed to elevated inflation readings.  Second-round effects have set in, as evident in the rise in core inflation. 

The BSP's baseline forecasts show the risk of inflation exceeding the inflation targets for 2008 and 2009. Price pressures have increased even as they are projected to ease starting late 2008.  For this reason, authorities believe that more decisive monetary action is necessary.  Sustained high inflation can unseat inflation expectations and potentially create a repeating cycle of lingering inflation and wage pressures that could prove costly to the economy.  By responding promptly to inflation risks, the BSP intends to reduce the risks to inflation expectations and the long-term cost to output growth from prolonged high inflation.  Authorities believe that the series of policy adjustments will help to steer inflation towards its desired path for the medium term.

The Monetary Board is prepared to take all necessary actions to address the threat of high inflation and promote price stability.

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