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BSP Maintains Key Policy Rates

02.09.2006

At its meeting today, the Monetary Board maintained the BSP’s key policy interest rates at 7.5 percent for the overnight borrowing or reverse repurchase (RRP) rate and 9.75 percent for the overnight lending or repurchase (RP) rate.  

The Monetary Board’s assessment of recent economic data continues to support keeping policy settings unchanged.  The sustained easing of core inflation, combined with indications of weaker demand based on consumer spending data and slowing domestic liquidity growth, suggests minimal demand-side pressures on goods and services in the near term.  As a result, the impact of rising inputs costs on consumer prices also remains muted. The strength of the peso also helps to offset potential near-term pressures on the cost side.  

Monetary authorities expect the impact of the RVAT to consist mainly of one-off increases in prices and is unlikely to fuel a sustained rise in inflation.  In addition, mitigating measures are also being planned to cushion the impact of the RVAT increase. The BSP fully supports the non-monetary measures of the National Government to address sharp price increases in major commodities and services. 

The BSP remains focused on achieving the inflation target for 2007 and addressing the risks to future inflation.  Global energy prices continue to be a key risk factor in the outlook for inflation. Spot and futures of oil have again assumed an upward path given geopolitical tensions in major oil producing countries.  In the near term, oil prices are expected to remain sensitive to news relating to supply disruptions given limited surplus production capacity. In addition, second round effects, particularly in the form of wage adjustments, and any adverse shift in inflation expectations due to the RVAT increase will continue to be monitored closely.  The Monetary Board continues to assess the evolving conditions for consumer prices, aggregate demand, domestic liquidity and other factors in order to determine the appropriate stance of monetary policy and undertake action if necessary. 

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