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BSP Maintains Key Policy Rates

07.01.2004

At its meeting today, the Monetary Board decided today 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 BSP’s policy rates were last changed on 2 July 2003 when the rates were cut by 25 basis points.

The latest assessment by Monetary Board suggests that prevailing conditions for output and inflation continue to support the argument for maintaining the present monetary settings. The inflation environment in the months ahead does not warrant a shift towards an immediate monetary tightening given that the recent uptrend in both headline and core inflation could be traced to relative price changes involving selected CPI components and, therefore, is not broad-based. Demand-side pressures on consumer prices also continue to be tempered by evidence of double-digit unemployment, spare manufacturing capacity, and subdued activity in both lending and investments.

The Monetary Board is also of the view that current expectations of an above-target headline inflation rate in 2005 are largely tied to supply-side developments particularly, higher energy prices, which led to the recent wage and transport fare adjustments, in addition to increases in utilities charges. The impact of these supply-side factors on inflation is likely to be transitory and thus, is not likely to be influenced by monetary action.

At the same time, the Monetary Board believes that the conditions for output growth continue to suggest a need for policy stimulus to remain in place. The presence of continued soft spots in domestic demand, absence of any sharp upswing in credit and investment activity, and the possibility of downside risks to external demand given expectations of tighter money in the major economies argue against the withdrawal of the policy stimulus to the real sector.

The Monetary Board also believes that the 25 basis point increase in the US Federal fund rate does not warrant a corresponding increase in the BSP policy rate at this point. Most markets have already priced in the US policy without significant repercussion on the peso whose volatility could have inflationary impact. The Board affirmed its position that BSP should be concerned with exchange rate volatility when there is threat of disorderly movement and when such movements could affect price stability.

In light of these conditions, the Monetary Board is of the opinion that the prevailing monetary settings remain appropriate given the current demand and supply conditions. Going forward, the BSP will continue to monitor carefully all developments that may affect the assessment of risks to inflation and inflation expectations over policy horizon. Monetary policy will continue to focus on ensuring price stability while remaining supportive of the economy’s growth objective.

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