The Monetary Board (MB), the policy-making body of the Bangko Sentral ng Pilipinas (BSP), decided to maintain the BSP’s key policy interest rates at 4% for the overnight borrowing or reverse repurchase (RRP) facility and 6% for the overnight lending or repurchase (RP) facility. The interest rates on term RRPs and RPs and special deposit accounts (SDAs) were also left unchanged. The BSP’s policy rates have been kept steady since July 2009.
In deciding to keep the BSP’s key policy rates steady, the Monetary Board noted that prevailing price and output conditions suggest that the stance of monetary policy continues to be appropriate for the time being. Latest baseline forecasts indicate that inflation will likely settle within the target range of 4% ±1% for 2011 and 2012. Core inflation has been stable and inflation expectations have so far remained manageable. Moreover, the growth of credit and liquidity remains moderate and there is thus far limited evidence of spillovers or second-round effects of supply shocks. In particular, while food inflation has recently risen, the Philippines has been the least affected in the region by global food price shocks, mainly due to favorable domestic supply conditions.
However, the Monetary Board observed that the balance of risks to the inflation outlook has tilted further to the upside, with more risks expected in the near future. Risks include food supply shocks coming from higher global food prices, the possible increase in domestic rice prices, and the potential impact of weather disturbances on agricultural output. Higher global oil prices and pending petitions for electricity rate increases also pose risks to the inflation outlook. In addition, demand-side price pressures could develop in the near future as actual domestic output continues to expand above historical trend. Meanwhile, a weaker global recovery could dampen external demand while a sustained strengthening of the peso should help temper the impact of imported inflation.
In view of these conditions, the Monetary Board agreed that containing inflation remains the BSP’s predominant policy thrust. It is prepared to undertake monetary action to arrest a potential build-up in inflation expectations and contain the second-round effects of supply shocks.