At its meeting today, the Monetary Board decided to maintain the BSP's key policy interest rates. At the same time, the Board increased anew the reserve requirement on deposits and deposit substitutes of all banks and non-banks with quasi-banking functions by one percentage point effective on 5 August 2011.
The Monetary Board's decision is based on its view that prevailing price and output conditions support maintaining current policy settings. Latest baseline forecasts showed a lower path consistent with the 3-5 percent inflation target range for 2011 and 2012 while inflation expectations remained well contained.
The Monetary Board also noted that bank lending has been growing at double-digit rates since January 2011, supported by the strong momentum of domestic economic activity and stable financial conditions. For this reason, the Monetary Board's decision to raise the reserve requirement anew is a forward-looking move to better manage liquidity. The Monetary Board is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth which could pose risks to future inflation. The Monetary Board believes that a prudent increase in the reserve requirement will help ensure that the inflation target will be met.
The Monetary Board emphasized that the risks around the inflation forecasts remain skewed to the upside, suggesting a need for caution in the monetary policy stance. The BSP therefore remains watchful against any risks to the inflation outlook and will adjust policy and prudential settings as needed to preserve price stability and financial stability.