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BSP Maintains Key Policy Rates

12.15.2005

At its meeting today, the Monetary Board maintained the BSP’s key policy interest rates at 7.5 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.75 percent for the overnight lending or repurchase (RP) rate.

The Monetary Board noted that the balance of economic evidence supports an unchanged policy setting. The current combination of generally favorable supply-side and demand-side pressures should provide a stabilizing influence on inflation expectations in the near term. In particular, the recent easing of energy prices, the strengthening of the peso, and the ongoing harvest season alongside normal weather conditions are likely to hold back cost-side inflation pressures. Equally important, the deceleration of liquidity growth and the continued easing of core inflation demonstrate the relative absence of demand-based inflation pressures. This is consistent with the observed slowdown in aggregate demand, particularly in consumer spending which remains the key driver of growth. The previous monetary tightening should also be allowed to run its course and impact on both liquidity growth and inflation expectations.

The Monetary Board also recognized that the risks to inflation still remain. Global energy prices may surge again and create uncertainty in the inflation outlook given limited global surplus production capacity. Potential shifts in the public’s inflation expectations may also become a risk given the relatively high level of inflation relative to government target. For the same reason, the Monetary Board views the possibility of second-round effects and the continued presence of ample liquidity in the financial system as potential risks to the inflation outlook.

The Monetary Board reiterates that it remains committed to the BSP’s inflation objectives and will continue to closely monitor the evolving conditions for consumer prices, aggregate demand, domestic liquidity and other factors in order to determine the appropriate stance of monetary policy and undertake action if necessary.

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