MANILA, November 21, 2003  (STAR) By Des Ferriols - The Bangko Sentral ng Pilipinas (BSP) decided yesterday to maintain its key policy rates as monetary officials expressed confidence that inflation would remain stable for the remainder of the year.

The BSPís key policy rates were kept at 6.75 percent for the overnight borrowing or reverse repurchase (RRP) rate and nine percent for the overnight lending or repurchase (RP) rate.

BSP Governor Rafael B. Buenaventura said the Monetary Board (MB) made an assessment of the prevailing inflation environment and voted unanimously to keep policy rates steady.

Buenaventura said the MBís assessment of the prevailing macro-economic and financial conditions had not changed significantly over the past six months in terms of their impact on future inflation and economic activity.

"The average inflation is expected to fall significantly below the 4.5- to 5.5-percent target for 2003," Buenaventura said. "Over the policy horizon, price dynamics should remain benign with the average inflation for 2004 expected to track the governmentís announced target," he added.

The BSPís own internal target was more aggressive at three to four percent for the whole year. As of September, the average inflation was steady at three percent.

Buenaventura explained that the MBís expectation of a benign inflation was based on assumptions that there would be subdued improvements in aggregate demands, particularly credit demand which has been lackluster since the 1997 Asian crisis.

Buenaventura said the MB also took cognizance of the soft labor market conditions along with the moderate influence of cost-push factors such as energy prices.

"Nevertheless, the MB recognized that the outlook for inflation still contains an undercurrent of risk in the form of possible adverse cost-side developments and adjustments in the foreign exchange market," he said. "This could have an effect on public expectations about future prices."

Buenaventura said market concerns over emerging domestic political developments also suggested the need for caution in formulating the monetary policy.

"Prospective decisions on the monetary policy stance will, therefore, maintain a careful balance between caution and the need to support a sustainable path for economic activity," he explained.

Reported by: Sol Jose Vanzi

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