At its meeting today, the Monetary Board decided to reduce the BSP's key policy interest rates by 25 basis points to 3.75 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.75 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. This is the third time this year that the BSP has cut its policy rates.
The Monetary Board’s decision is based on its assessment that price pressures have been receding, with risks to the inflation outlook slightly skewed to the downside. Latest baseline forecasts indicate that inflation is likely to settle within the lower half of the 3-5 percent target for 2012 and 2013, as pressures on global commodity prices are seen to continue to abate amid weaker global growth prospects. Inflation expectations continue to moderate at levels consistent with the inflation target. Nevertheless, monetary authorities remain watchful over potential upside risks, including pending electricity rate adjustments, expectations of higher prices for some food products due to the prolonged drought in the US, and firm domestic demand pressures.
At the same time, the Monetary Board believes that the prospects for global economic activity are likely to remain weak. In the advanced economies, financial market stress continues to build up, and there remain concerns about the prospects for urgent fiscal adjustments and reforms. While the Philippine economy can rely on the resilience of domestic spending to sustain growth, additional policy support would serve as a buffer against strong global headwinds.
On balance therefore the benign inflation outlook provides room for a reduction in policy rates as a pre-emptive move against the risks associated with the global slowdown. Going forward, the BSP will continue to monitor emerging price and output conditions to ensure that monetary policy remains supportive of sustained non-inflationary economic growth.