What do higher BSP interest rates mean?

Bangko Sentral ng Pilipinas Governor Benjamin Diokno last week announced the lifting of key central bank rates for the first time in three years. PHOTO BY JOHN RYAN BALDEMOR

Citing improving economic growth and rising inflation, the country’s monetary authorities eventually raised the central bank’s benchmark interest rates for the first time in three years.

Effective May 20, the Monetary Board raised overnight borrowing, lending and deposit rates by 25 basis points to 2.25%, 1.75% and 2.75%, respectively.

While Governor Benjamin Diokno of Bangko Sentral ng Pilipinas said monetary authorities believe raising the interest rate at the right time will help prevent future second-round effects and temper inflation expectations, the real question is what this latest development means for the general public.

We interviewed some of the country’s economic experts, and here’s what they had to say:

“A higher local policy rate could result in higher borrowing/funding costs for consumers, businesses [including some listed companies] and other institutions,” said Michael Ricafort, chief economist of Rizal Commercial Banking Corp.

Senior Economist Nicholas Antonio Mapa of ING Bank Manila noted that policy rate hikes have a direct impact on people’s economic lives, pointing out that rising borrowing costs make it more expensive to invest or contract. new loans.

He pointed out that this would reduce the number of large companies and the number of households buying real estate and durable goods, and that the slowdown in economic activity would lead to lower incomes, lower employment and slower the economy as a whole.

Consumer spending affected

“Finally, affordable credit has been a mainstay not only of investment, but also of consumption. Throughout the pandemic, lower rates have contributed to a sustained increase in consumer payroll loans, helping Filipinos continue their consumer business despite the recession,” Mapa said.

Higher policy rates, noted Bank of the Philippines (BPI) chief economist Emilio Neri Jr., will make borrowing more expensive for consumers. Interest rates on their credit cards and home loans, for example, are likely to rise.

“If you think about it, though, many consumers have lost their line of credit during the pandemic because lenders can’t extend credit to those who don’t have a job or have very little income to show their ability to pay. However, because the economy is now recovering from the pandemic, many people are actually regaining access to credit,” he noted.

Looking at it that way, Neri thinks only people who had access to financing during the pandemic might end up paying extra interest.

He went on to say that lower rates for Class A and B during the pandemic were probably just gravy for them, and slightly higher rates won’t affect their spending habits. Overall, there is not much loss for borrowers.

Another less typical view, the BPI economist pointed out, is that rate hikes help cushion the depreciation of the peso and therefore slow inflation.

“If that’s the case, then consumers are better off because they don’t have to suffer so much from imported inflation, especially that which is felt in oil, energy and food products,” he explained.

From the perspective of savers, Neri believes that if their investment returns improve, it favors more conservative investors. Those who are aggressive and buy stocks, for example, can lose if stock market participants think the cost of borrowing from their favorite listed company would cause earnings to slow.

“However, if the reopening of the economy due to lower alert levels is going to boost revenue at restaurants like Max’s or Jollibee, rising rates may have less of an impact on business results than improving revenue due to reopening,” he said. Underline.

Control inflation

For his part, the Union Bank of the Philippines’ Chief Economist, Ruben Carlo Asuncion, said that “in terms of impact on the general public, increases in monetary policy are meant to prevent inflation from continue to increase, which would be detrimental to the purchasing power of ordinary citizens”. person and potentially prevent pressure on economic actors, in particular producers and manufacturers of goods and services.

Meanwhile, Security Bank Corp. Assistant Vice President and Economist Robert Dan Roces said the policy change highlights how much different current inflation conditions are from those of the past; now inflation is far more threatening and shocking, with demand picking up and commodity prices soaring, while the pandemic remains a constant threat.

“Thus, the action is timely; second-round effects, including higher-than-expected wage increases and demands for higher transport fares, reinforce the view of inflation and, therefore, the political decision. should strike a balance between supporting the recovery of growth and protecting consumption from the threat of inflation,” he noted.

Comments are closed.