MONETARY AUTHORITIES want to keep policy rates at current levels, saying an environment of low interest rates is needed to ensure that the domestic economy fully recovers from the effects of a global downturn.

The central bank can afford to maintain its key policy rates at historic lows given that the increase in consumer prices remains benign, said Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr.

?As the inflation outlook continues to be manageable, monetary policy settings remain appropriate at this time,? Tetangco said in a text message to reporters.

The central bank chief made the statement following the release of the inflation report for August.

The National Statistics Office yesterday reported that annual inflation, or the rate of increase of consumer prices, slowed down further to only 0.1 percent in August.

This was the slowest rate in 22 years, or since April 1987. In March 1987, inflation hit the negative territory at -0.6 percent.

Price movements in August brought average inflation for the first eight months of the year to 3.7 percent. This keeps prices on track, helping the government meet its full-year average target of between 2.5 and 4.5 percent.

From December to July, the BSP implemented a series of rate cuts, bringing down its overnight borrowing and lending rates to record lows of 4 percent and 6 percent, respectively.

By doing so, the BSP hoped to influence banks to slash their lending rates as well to spur credit demand, and encourage consumption and investments.

Drop in interest rates have the tendency to accelerate inflation within the short to medium term. But the BSP said faster increase in inflation would be all right as long as targeted ceilings would not be breached.

Tetangco said inflation could remain soft for some time.

BSP Deputy Governor Diwa Guinigundo agreed that it was too early to implement interest rate hikes.

?The accommodative stance will stay at the moment,? Guinigundo said.

The deputy governor said the economy would need further support from monetary policy through 2010.

While there are projections that the economy could post faster growth next year, he said, full recovery from the downturn would not likely happen soon.

Guinigundo said the BSP would maintain other measures it earlier implemented to help spur the economy.

These include the adoption of higher budget for rediscounting, under which it lends to banks in need of immediate liquidity, and the lowering of the reserve requirement from 21 to 19 percent of deposit liabilities.

Reserve requirement is the portion of deposits that banks are required to keep with the central bank as reserves.

A drop in the reserve requirement increases the amount of funds that banks may lend to consumers and businesses.

The economy, measured in terms of gross domestic product, grew by one percent in the first half.

According to officials, the economy is poised to achieve the official growth target of between 0.8 and 1.8 percent for the full year.