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Bangko Sentral Leaves Key Policy Rates Unchanged

03.13.2003

At its meeting today, the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), decided to leave the BSP’s policy rates unchanged at 7.0 percent for the overnight borrowing rate and 9.25 percent for the overnight lending rate. The BSP’s policy rates have been on hold for the past 12 months, with the rates last changed on 15 March 2002 when they were reduced by 25 basis points.

In assessing the inflation environment and overall macroeconomic conditions, members of the Monetary Board noted that continuing evidence of a generally subdued inflation environment going forward underlies  expectations that average inflation in 2003 will be broadly in line with the government’s full-year target of 4.5–5.5 percent.  Recent movements in headline inflation have been linked  mainly to  food and fuel, which suggest that  supply-side factors play a major role in current price movements.   The  present demand conditions remain consistent with a benign inflation setting in the near term due to  the relative absence of  broad-based price  changes across commodity groups.   Prospective risks to  inflation likewise relate mainly to cost-push influences, such as those arising from the impact on farm prices of the El Niño phenomenon and  the escalation in world oil prices due to geopolitical developments.  Such risks are for the most part expected to be temporary.

The Monetary Board also noted that the overall strength of aggregate demand, while improving,  remains tentative.  Labor market conditions remain soft and  capacity utilization  in  the manufacturing sector is still below normal levels. These indicators suggest that previous monetary easing should still be allowed to  work its way through the real sector.  The lack of clear-cut signs of a sustained upturn in domestic demand is complicated by indications of weaker economic activity overseas, implying continued sluggishness in external demand.

Given the foregoing considerations, the Monetary Board believes that it would be prudent to maintain current monetary policy settings and keep policy interest rates steady, while continuing to closely monitor any evidence that points to pressures on inflation.

The Monetary Board also expressed concern over the recent movements of the exchange rate and its willingness in  the future to resort to  monetary tightening  measures should the depreciation of the peso threaten  the inflation target.

The Monetary Board is scheduled to meet again to review the BSP’s monetary policy settings on 10 April 2003

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