At its meeting today, the Monetary Board decided to increase by another 25 basis points the BSP’s key policy interest rates to 4.5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.5 percent for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also raised accordingly.
In deciding to increase policy rates anew, the Monetary Board noted that the latest baseline inflation forecasts continue to suggest that the 3-5 percent inflation target for 2011 remains at risk, mainly as a result of expected pressures from oil prices. International oil prices have remained elevated due to strong global demand as well as concerns about supply gaps. Global non-oil markets also continued to tighten.
Upward shifts in the public’s inflation expectations remain a major policy consideration for the BSP. Recent surveys, including the Asia Pacific Consensus Forecasts, the Consumer Expectations Survey, and the BSP’s survey of private sector economists, show elevated inflation forecasts for 2011 and higher expected inflation for 2012. Sustained price pressures and higher inflationary expectations could influence future wage and price outcomes. With these considerations, the Board deemed it prudent to rein in inflation expectations further and contain second-round effects with a follow-through policy action.
At the same time, the Monetary Board noted that the economy is expected to grow above trend. Capacity utilization of the manufacturing sector has remained consistently above 80 percent while lending for production activities continues to expand, indicating the sustained pick-up in private investment. Consumer lending has remained robust while vehicle sales were sustained despite rising fuel costs. The Monetary Board also noted that, while domestic liquidity and credit grew at a reasonable pace, sustained strong foreign capital inflows warrant careful attention to ensure that they do not exacerbate domestic liquidity levels and fan inflationary pressures in the future. The Monetary Board remains prepared to take appropriate actions necessary to ensure the achievement of the BSP’s price stability objective.