At its meeting today, the Monetary Board decided to reduce the BSP's key policy interest rates by 25 basis points to 4.25 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.25 percent for the overnight lending or repurchase (RP) facility, effective immediately. The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also reduced accordingly.
The Monetary Board’s decision is based on its assessment that the inflation outlook remains comfortably within the target range, with expectations well-anchored. Latest baseline forecasts indicate that average annual inflation rates are likely to fall within the lower half of the 3-5 percent target range up to 2013. Pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. However, the impact of strong capital inflows on domestic liquidity and the effect of geopolitical tensions in the MENA region on global oil supplies will continue to pose upside risks to inflation.
At the same time, the Monetary Board considers the overall balance of global economic activity to be tipping towards a further slowdown. Although the US economy has been showing signs of improvement, it remains vulnerable to financial market volatility amid continued concerns about long-term fiscal sustainability. Meanwhile, the Euro area economy is notably weaker with interlocking sovereign debt and banking problems weighing down on global sentiment. Amidst these developments, the Philippine economy is likely to face external headwinds in 2012. While the Philippine economy continues to expand, sustained domestic spending is expected to compensate for weaker external demand.
Given these considerations, the Monetary Board has concluded that the benign inflation outlook allowed some scope for a reduction in policy rates to help boost economic activity and support market confidence. The BSP shall continue to monitor emerging demand and price developments to ensure that monetary policy settings remain supportive of non-inflationary economic growth.