At its meeting today, the Monetary Board decided to leave 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 have been kept unchanged over the past ten months; the last policy rate reduction of 25 basis points was done on 2 July 2003.
Based on the latest assessment by the Monetary Board of prevailing macroeconomic and financial conditions, the outlook remains that of a continued manageable environment for inflation over the policy horizon. Cost-side factors—notably transport fares, utility charges and fuel costs—remain the principal source of risks to future inflation. Inflationary pressures resulting from such factors are largely outside the influence of monetary policy, and therefore do not require action from monetary authorities. In addition, the continued evidence of double-digit unemployment, spare capacity in manufacturing and sluggish bank lending over the past several quarters indicate that significant demand-driven pressures on consumer prices are not likely to materialize in the near term.
Nevertheless, monetary authorities continue to face inflation risks from sentiment-driven volatile movements in the nominal exchange rate, as a result of political uncertainty and investors’ concern about the attainability of fiscal consolidation over the medium term.
After discussing these considerations, the Monetary Board agreed that the balance of demand- and supply-side risks to inflation continues to point to a manageable environment for inflation over the next year or so. After due consideration of prevailing inflationary risks, the Monetary Board expects average inflation for 2004 and 2005 to lie within the Government’s inflation target of 4.0-5.0 percent.
Going forward, the BSP will continue to monitor closely all developments that may affect the outlook for inflation and inflation expectations over the policy horizon.