The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), decided today to leave the BSP’s policy interest rates—the overnight borrowing rate and the overnight lending rate—unchanged at 7.0 and 9.25 percent, respectively. Policy rates have been on hold since 15 March 2002.
In its discussion on the monetary policy stance, the Monetary Board expressed the view that, given a weaker external environment and with inflation contained, prudence would suggest monetary settings that are supportive of domestic demand. In this regard, the members of the Monetary Board consider the present policy setting to be adequately expansive for the needs of the economy. They particularly noted the indications of a turnaround in credit demand, as shown by the rise in bank lending in September, which suggests that previous reductions in BSP policy interest rates could be already having their intended effect. Given the recognized long lags in monetary policy, the stimulatory impact of past monetary easing may have yet to work itself fully through the system. Maintaining policy rates at their present levels thus allows monetary authorities sufficient time to gain a firmer indication of how recent policy moves all play out.
The Monetary Board decision to stay its hand was also formed in part by its view on government debt dynamics. Given the fiscal outlook for the whole of 2002 and for 2003, the Monetary Board noted that forecasts for next year’s inflation show that it is likely to settle within the 4.5-5.5 percent target range. Thus the expected budget deficits announced today by the National Government do not warrant a monetary response in the form of higher policy rates.
The Monetary Board also emphasized that current monetary decisions must be thought of as part of a dynamic sequence of future policy actions. To this end, less precipitate action now enables policymakers to avoid rate increases at a later point in the policy horizon when the economy is already beginning to pick up steam. Moreover, the recent sizable policy rate reduction by the US Federal Reserve has afforded the BSP with greater room to maneuver and keep its own policy rates on hold.
Dynamic and forward-looking monetary policy requires a constant and clear-eyed assessment of changing domestic and global economic conditions. Thus, monetary authorities emphasize that they will continue to closely monitor key developments in the macroeconomic environment.
The Monetary Board is scheduled to meet again on 19 December to reexamine the BSP’s monetary policy settings.