Philippines: Central Bank Maintains Key Policy Rates, Approves New Measures

Apr. 20, 2007

MANILA, April19 — At its meeting today, the Monetary Board decided to maintain the BSPs 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 tiering system on bank placements with the BSP was also retained.

In its assessment of the monetary policy stance, the Monetary Board noted that recent price developments are consistent with the BSPs and the markets expectations of a generally benign inflation outlook. Supply-side pressures continued to ease in recent months given stable food prices, improved weather conditions, and the strengthening peso. The lagged impact of the monetary tightening in 2005 contributed to the slowdown in inflation. At the same time, demand-side pressures remained manageable.

However, risks to the inflation outlook remain. Growth in domestic liquidity has been strong and this could persist given the prospect for sustained foreign exchange inflows. In addition, renewed volatility in oil prices continue to be an upside risk to future inflation given the still-limited global production capacities and possible geopolitical disturbances.

While liquidity is not a concern at present, the Monetary Board believed that strong monetary growth could build up inflationary pressures over the medium term. To address this potential risk, the Monetary Board approved new monetary measures as follows:

1. Encourage GSIS, SSS, and other GOCCS to deposit funds with the BSP;
2. Allow trust departments of banks to deposit with the BSP; and
3. Allow SDA placements of banks to be deemed as alternative compliance with the liquidity floor requirements for government deposits.

These measures will take effect on 10 May 2007.

The Monetary Board will continue to monitor closely the evolving monetary conditions in order to safeguard price stability and provide the macroeconomic environment supportive of a sustainable economic growth. (BSP)

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