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The Philippines Monetary Board has decided to increase by 25 basis points the central bank’s key policy interest rates to 4.25 percent for the overnight borrowing or reverse repurchase (RRP) facility and 6.25 percent for the overnight lending or repurchase (RP) facility.  The interest rates on term RRPs, RPs, and special deposit accounts (SDAs) were also raised accordingly.

The Monetary Board’s decision was based on signs of stronger and broadening inflation pressures as well as a further upward shift in the balance of inflation risks.  International food and oil prices have continued to escalate due to the combination of sustained strong global demand and supply disruptions and constraints.  Reflecting these, Philippine headline and core (or underlying) inflation have started to rise.  The latest baseline inflation forecasts now indicate that the 3-5 percent inflation target range in 2011 could be at risk.

Given these developments, the Monetary Board decided to act promptly to rein in inflation expectations. The Monetary Board believes that a preemptive response will minimize the overall impact of rising inflation on domestic economic activity by helping to firmly anchor the public’s inflation expectations. Well-anchored inflation expectations would safeguard price stability and, therefore, preserve the public’s purchasing power.   Buoyant domestic demand conditions provide room for a policy interest rate hike without affecting the country’s economic growth prospects.

The Monetary Board emphasizes that it continues to closely watch the evolving global situation, focusing in particular on the macroeconomic risks of protracted political tensions in the Middle East and North African region and the growth and inflation implications of the recent disasters in Japan, where events continue to unfold.

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