Following its meeting today, the Monetary Board—the policy-making body of the Bangko Sentral ng Pilipinas (BSP)—decided to keep the policy rates steady 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 at these levels for the past nine months.
Based on its assessment, the Monetary Board believes that the current monetary policy stance is appropriate given generally tame inflation and weakness in domestic demand as well as continued uncertainty in the strength of the world economic recovery. Average inflation for 2002 is expected to be well below the full-year target of 4.5-5.5 percent. However, the Monetary Board recognizes that there are possible risks to inflation due, among other things, to the impact of the El Niño weather disturbance on agricultural output and the ramifications on local oil prices of the ongoing geopolitical tensions in the Middle East, the announced cuts in oil production of OPEC members and the protracted general strike in Venezuela. Concerns about the sustainability of the country’s fiscal position and its impact on debt dynamics could also have repercussions on inflation expectations. The government, however, has emphasized that fiscal prudence will be a key plank in its pursuit of greater macroeconomic discipline in 2003 and beyond. Possibly offsetting these factors are the absence of demand-side pressures, highlighted by the slowdown in manufacturing activity in the third quarter and the continued spare capacity in manufacturing of about a quarter of total output capacity.
The Monetary Board also noted that the current environment of declining market interest rates has led to lower real interest rates in the Philippines over time. Based on the latest data available, the Philippines real lending rate—measured by the difference between the low-end of banks’ lending rate and inflation—trended downward to 5.6 percent as of 3 December 2002 from a high of 12.9 percent prior to the easing of policy rates by the BSP in December 2000. At the same time, the country’s real lending rate compares favorably with those of other Asian countries. The Philippines’ real lending rate together with Singapore’s rank as the fifth lowest in a sample of Asian economies, after Japan (2.5 percent), South Korea (3.9 percent), Malaysia (4.4 percent) and Thailand (5.1 percent). By contrast, the real lending rates of Hong Kong, Taiwan, Indonesia and India are higher. A low real interest rate is expected to boost business spending over time and help sustain the robust consumption spending which would contribute toward a sustainable economic recovery. Already, there are some indications of a turnaround in credit demand, as shown by the steady rise in bank lending in September and October, suggesting that previous reductions in BSP policy interest rates could be having their intended effect. Given the long lags in monetary policy, the stimulatory impact of past easing may have yet to work itself fully through the system. Maintaining the BSP’s policy rates at their current levels would thus provide monetary authorities sufficient time to gain a firmer handle of how past monetary policy easing moves will play out in the real sector.
Dynamic and forward-looking monetary policy requires a constant and careful assessment of evolving domestic and global economic conditions. Thus, the monetary authorities emphasise that they will continue to monitor closely key factors bearing on the overall macroeconomic environment, primarily on inflation as well as on production.
The Monetary Board is scheduled to meet again to re-examine the BSP’s monetary policy settings on 16 January 2003.