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BSP Maintains Key Policy Rates

11.18.2004

At its meeting today, the Monetary Board decided to keep the BSP’s key policy interest rates unchanged at 6.75 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.0 percent for the overnight lending or repurchase (RP) rate.

The decision was based on the Monetary Board’s assessment that expected trends in output and inflation over the next year or so remain largely unchanged relative to the previous assessment of the monetary stance. Ongoing pressures on consumer prices continue to come primarily from supply-side side factors, notably increases in commodity prices such as food and oil. More importantly, such factors also remain the driving influence of the inflation outlook. These conditions provide a strong argument for leaving policy interest rates at their present levels. This argument is further supported by lingering concerns about the strength of overall demand in the economy, particularly in view of the relatively high unemployment rate and the moderate growth of bank lending.

On the other hand, the observed rise in the official and other measures of core inflation suggest the possibility of emerging demand-side effects from ongoing supply shocks. However, such measures are outweighed by other information on demand conditions. The rate of core inflation represents the long-run trend in consumer prices after excluding the impact of temporary shocks to the economy, many of which are often linked to supply-side factors. The official measure of core inflation, which is published by the National Statistics Office (NSO), is defined as CPI inflation after excluding selected food- and energy-related components.

Nevertheless, the pattern of rising consumer prices over the past year or so implies a greater risk that the public will come to expect higher inflation in the future, and a greater threat that higher inflation will fuel a self-sustaining rise in expected inflation. Such risks are bolstered by the possibility that the uptrend in commodity prices will persist until 2005, and that renewed exchange market pressure may arise from negative market sentiment concerning the government’s fiscal performance. A combination of these factors could pose a threat to the inflation target.

In sum, therefore, the economic evidence supports keeping present policy settings unchanged, but also suggests a greater need for readiness to undertake a swift monetary policy action. However, prospective actions aimed at monetary tightening will be oriented primarily towards guiding the public’s expectations concerning future inflation. To this end, the BSP continues to watch closely for signs of price pressures arising from the demand side and from inflation expectations. Finally, direct action against supply-side risks remains a key policy priority for authorities. The BSP thus continues to support all possible means of non-monetary intervention in the importation, distribution and delivery of goods and services.

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