The Bangko Sentral ng Pilipinas (BSP) has recently raised its benchmark policy rate, and borrowers of money from banks — be they individuals or corporations — are now feeling the pinch.
Since May this year, the Philippine Monetary Board has started raising the interest rate on money that the BSP borrows overnight from banks by a total of 1.75 percentage points. From an all-time low of 2 percent, the interest rates have since increased to 3.75 percent.
“Clearly, it [the policy rate hikes] will make the borrowing cost higher,” BSP Governor Felipe Medalla said in a statement. “In fact, they [interest rates on bank loans] have already gone up before we increased the rates.”
Medalla went on to explain that even prior to the announcement of a 0.5-percentage-point policy rate increase, which was made on August 18, the market had already followed the BSP’s lead when the central bank announced a 0.75-percentage point policy increase last July 14.
“I think the 50-basis-point increase will have little effect because markets have already anticipated it, and the rates have already gone up,” the BSP chief said.
“What we are looking at now is how the various firms that will be affected will perform,” he added. “For a number of firms — rate increase or no rate increase — they will surely have a hard time, judging by their financial statements.”
The picture will get ‘redder’ for borrowers
“The picture is red and will get redder,” said Medalla in describing the situation of borrowers today who are already struggling.
However, the number of firms that will add to the number of suffering borrowers is just very small.
Medalla explained that in the BSP’s sample of companies, it found that only six out of the more than 200 firms will go from “yellow to red” alert.
“Clearly, it will affect the economy, but these are just some of the trade offs,” he said. “If you take a long-run view, the effect on output is actually positive. Since we already acted now, we don’t have to raise too much later. Postponing it will probably require even bigger adjustments later.”
The effects of higher policy rates
Michael Ricafort, chief economist at the Rizal Commercial Banking Corporation, noted that higher policy rates tend to increase the funding costs.
This, in turn, leads to higher lending rates for salary loans, business loans, and consumer loans such as housing loans or mortgages and auto loans.
The same goes for borrowing costs for the government to finance both its spending and budget deficits.
Ricafort added that higher borrowing and financing costs tend to reduce the demand for loans to finance various business and economic activities, thereby lowering demand in the economy.
These demands include the purchases of commodities like oil, thus leading to slower economic growth and some slowdown in inflationary pressures.