At its meeting today, the Monetary Board decided to reduce, effective immediately, the BSP’s key policy interest rates by 50 basis points 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 (SDAs) were also adjusted accordingly. This rate cut follows the reduction in policy rates that was implemented in December last year.
The Monetary Board based its decision on the latest inflation outlook which shows inflation falling within the target range for 2009 and 2010. The Board noted that the balance of risks to inflation is tilted to the downside due to the softening prices of commodities, the slowdown in core inflation, significantly lower inflation expectations, and moderating demand. However, some upside risks to inflation remain, including the volatility in oil prices and in exchange rates.
Given the improved inflation outlook, the Monetary Board believes that there is room for further easing in the monetary policy stance, which should also provide support to financial markets and the real economy. Monetary easing could help promote the smooth functioning of the financial system through easier access to liquidity and credit, and in the process also shore up market confidence. The Monetary Board accordingly encouraged banks to pass on the reduction in policy rates to their lending rates.
The Monetary Board also noted that weak conditions in major economies are weighing down on the country’s economic performance through their impact on trade, investment and consumption. In this regard, monetary policy easing will complement the fiscal stimulus, which includes accelerated infrastructure spending and targeted social programs.
Monetary policy will continue to be focused on the price stability objective, while being mindful of the liquidity and credit requirements of the economy.