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Monetary Board Keeps Policy Rates Steady, Withdraws Crisis-Relief Measures

03.11.2010

At its meeting today, the Monetary Board decided to keep the BSP’s key policy interest rates steady at 4 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6 percent for the overnight lending or repurchase (RP) facility.  The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also left unchanged. 

The broad contours of the economy support the Monetary Board’s assessment that current policy interest rate settings remain appropriate.  The inflation outlook remains manageable, with the latest BSP baseline projections indicating within-target inflation in 2010 and 2011 as demand-side pressures remain modest and inflation expectations well-contained.  Meanwhile, the current movements of asset prices, particularly in the equities and property markets, do not appear to pose any significant short-term challenges to the economy. 

At the same time, the Monetary Board noted that a broad range of indicators point to increasing momentum in domestic economic activity. Latest export numbers have been quite strong, and export growth is likely to gain more traction as the global economic outlook improves. While the recent pick-up in inflation has emanated largely from the supply side, conditions warrant a closer monitoring of upside risks—which include the food supply impact of the El Niño weather phenomenon, power supply concerns, possible demands for wage adjustments and global commodity price increases—as these could lead to a build-up in inflationary pressures and inflation expectations. The Monetary Board will act decisively and adjust monetary policy settings accordingly if and when the second-round effects of supply shocks become evident.

Given ample liquidity and the continued stability of financial markets, the Monetary Board also decided to phase out liquidity-enhancing crisis response measures, effective 15 March 2010.  In particular, the Board decided to reduce the peso rediscounting budget from P60 billion to P40 billion.  It also agreed to restore the loan value of all eligible rediscounting papers from 90 percent to 80 percent of the borrowing bank’s credit instrument, as well as bring back the non-performing loan ratio requirement of two percentage points (from ten percentage points) above the latest available industry average NPL for banks wishing to avail of the rediscounting facility. 

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