At its meeting today, the Monetary Board decided to maintain the interest rate on the BSP’s overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios were likewise left unchanged.
The Monetary Board’s decision is based on its assessment that the inflation environment continues to be manageable. Latest forecasts indicate that average inflation is likely to settle near the lower edge of the 3.0 percent ± 1.0 percentage point target range in 2016 and rise toward the mid-point of the target range in 2017 and 2018. The overall balance of risks surrounding the inflation outlook is now deemed to be broadly balanced. With global oil prices recovering, the risk of second-round effects from lower oil prices is likely to recede in the period ahead. Nevertheless, slower global economic activity remains a key downside risk to the inflation outlook. Given improved rainfall conditions and the shift to neutral weather conditions in the May-July period, the upside risks to food and utility prices due to El Niño are also seen to recede in the coming months. However, pending petitions for adjustments in electricity rates remain an upside risk to inflation. Meanwhile, inflation expectations remain broadly consistent with the inflation target over the policy horizon.
At the same time, the Monetary Board also observed that prospects for global economic growth have remained subdued since the previous meeting, with increased downside risks to global activity. On the other hand, domestic economic activity continues to be firm, supported by solid private household consumption and investment, buoyant business and consumer sentiment, and adequate credit and domestic liquidity. Higher fiscal spending is also expected to further boost domestic demand.
On balance, therefore, the sum of recent new information, particularly on the emerging outlook for inflation and demand conditions, continues to support keeping monetary policy unchanged. At the same time, the continued uncertainty relating to monetary policy prospects in major advanced economies requires a steady hand on policy settings in order to retain flexibility in the period ahead.