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Monetary Board Hikes Policy Rates by 25 Basis Points

07.31.2014

Statement by BSP Governor Amando M. Tetangco, Jr.

At its meeting today, the Monetary Board decided to increase the BSP's key policy 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.  The interest rates on term RRPs and RPs were also raised accordingly. The rate on special deposit accounts (SDA) was left unchanged. Meanwhile, the reserve requirement ratios were also kept steady.

The Monetary Board’s decision is a preemptive response to signs of inflation pressures and elevated inflation expectations. Latest baseline forecasts indicate that the inflation target could be at risk, as the forecasts have shifted closer toward the higher end of the target range of 3±1 percent for 2015. At the same time, the balance of risks to the inflation outlook continues to be tilted toward the upside, with price pressures emanating from higher food prices, short-term volatility in international oil prices, and pending petitions for adjustments in power rates and transport fares. Moreover, while inflation expectations remain within target, they are seen to be settling toward the upper end of the inflation target range, particularly for 2015. The Monetary Board also sees the increase in policy rates as a preemptive measure in the context of the eventual normalization of monetary policy in some advanced economies.

Given these considerations, the Monetary Board believes that an increase in the BSP’s policy rates will moderate inflation pressures and arrest potential second-round effects by helping anchor inflation expectations. The Monetary Board noted that the continued favorable outlook for domestic demand allows some scope for a measured adjustment in policy rates without adversely affecting the country’s economic growth prospects.

Going forward, the BSP will remain vigilant against risks to price and financial stability and stands ready to undertake further policy actions as necessary.

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