In its meeting today, the Monetary Board decided to keep the BSP’s policy rates on hold for the seventh consecutive time this year at 7.0 percent and 9.25 percent for the overnight RRP (or borrowing) and overnight RP (or lending) rates, respectively. The current policy rates have been maintained on an even keel since 15 March 2002.
Based on its assessment of a comprehensive set of economic and financial indicators that has become available since its last meeting on monetary policy, the Monetary Board believes that inflation is likely to remain tame for the rest of the year and the course of the monetary policy horizon. While there are signs of modest improvements in domestic economic activity as reflected in the favorable outturn in output growth and export numbers for the second quarter, other indicators still point to softness in domestic demand. Spare capacity in manufacturing remains relatively high at about a quarter of firms’ total output capacity. Credit conditions are still weak despite a slowdown in the contraction in bank lending in July. The Philippine economy also faces downside risks coming from the external sector such as the uncertainty over the robustness of the global economic recovery as well as the continuing threat of a US-led offensive against Iraq. Moreover, there are potential sources of upside pressures to the inflation outlook over the policy horizon such as the uncertainty over the impact of El Niño weather phenomenon on agricultural crop production in 2003, sustained uptrend in world oil prices, delayed but eventual adjustment in light and water charges, the wider fiscal deficit and the recent exchange rate movements.
The Monetary Board believes that given the potential sources of upside pressures to future inflation and inflationary expectations combined with the uncertainty over the extent and sustainability of the pick-up in domestic demand, monetary policy should continue to provide a supportive environment that would foster a sustainable recovery in domestic demand while guarding firmly against the risks to the inflation outlook. The Monetary Board maintains the view that the current monetary policy stance is appropriately supportive of the economy’s low-inflation growth path.