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BSP Maintains Key Policy Rates

06.30.2005

At its meeting today, the Monetary Board decided to keep the BSP’s key policy interest rates unchanged at 7.0 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.25 percent for the overnight lending or repurchase (RP) rate.

During its deliberations on the monetary policy stance, the Monetary Board noted that the outlook for inflation and domestic demand suggests that there is flexibility for monetary authorities to maintain the current policy settings based on the following considerations:

Underlying conditions in the inflation environment continued to be driven mainly by rising oil prices. Meanwhile, demand-side pressures remain largely absent amid evidence of moderating consumption growth, sluggish private credit activity, and general indications of spare capacity in the economy.

Inflation expectations, however, appear to be manageable despite resurgence in oil price pressures,  the emergent risks from transport fare increase and the impact of the VAT  reform in the short run.

The  Monetary Board, however, noted the need to monitor closely the current pressures in the foreign  exchange market. While sentiment-driven and prompted largely by developments in the political front, monetary authorities observed that the volatility in the exchange rate could affect inflation expectations. The prospect of narrowing interest rate differentials given the tightening mode of the US also poses an additional risk to the stability of the currency with potential  inflationary impact. 

Given these considerations, the Monetary Board emphasized that it will continue to monitor indications of inflation expectations to guard against any adverse shift in the public’s expectations on future prices and reassured the public that it stands ready to undertake policy action to ensure that inflation remains anchored.

At the same time, the Monetary Board emphasized the need to continue to strengthen transparency and communication of policies and prospects of inflation in order to help manage inflation expectations. The Monetary Board also reiterated that direct non-monetary measures to ensure the availability and distribution of basic food products to cushion the price pressures  remain crucial.

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