What the BSP's rate hike means for you

People cross a street to shop in the Divisoria district of Manila on November 30, 2021.
AFP / Ted Aljibe

MANILA, Philippines — The Bangko Sentral ng Pilipinas on Thursday took its first decisive action to tap the brakes on quickening inflation by raising its benchmark rate for the first time in over three years.

At their meeting, the Monetary Board raised the policy rate by 25 basis points to 2.25%, hoping that the higher borrowing costs would temper consumer demand that’s stoking inflation.

Governor Benjamin Diokno said the magnitude of future rate hikes would be “data dependent”, although analysts expect the tightening to be gradual to avoid damaging the economy.

Here’s how this major central bank action will affect Filipinos amid the pandemic.

Expensive loans

Banks typically use the BSP’s benchmark rate when charging interest rates on different kinds of loans. That said, yesterday’s decision would mean higher interest rates when you swipe your credit card or take out bank loans to buy a house or a car.

Of course, if you can afford to pay the heftier interest, borrowing from banks would not be a problem for you. For Jun Neri, lead economist at Bank of the Philippine Islands, access to credit is easier now compared to before when banks tightened their lending standards at the onset of the pandemic.

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"Because the economy is now bouncing back from the pandemic, a lot of people are actually regaining access to credit again. If you look at it from that perspective, only those who had access to credit during the pandemic are the ones that could end up paying more interest," Neri said.

Savings

BSP’s rate adjustments also affect the yields on bank deposits.

"Depositors can expect higher interest rates in their savings—but usually banks delay the adjustments," Michael Enriquez, chief investment officer at Sun Life Investment Management and Trust Corp., said.

Stock market investing

Rate hikes are usually bad for stocks because they can hurt the profit of businesses, including publicly-listed companies. Businesses typically borrow from banks to fund their spending requirements, so a rate increase might prompt firms to defer any expansion plans.

At the same time, higher rates could make it difficult for some companies to pay their debts.

But there are cases when the stock market rallies after a rate hike announcement, especially if the plan was well-telegraphed. There are chances when investors would perceive the central bank as being serious in fighting inflation, which is also a major threat to businesses.

"Those who are aggressive and buy stocks, for example, may suffer if the stock market players think the borrowing cost of their favorite listed company will cause a drag in profitability," BPI’s Neri said.

"However, if the economy's reopening due to lower alert levels is going to boost the revenue of restaurants like Max's or Jollibee, the rate hike may have a smaller impact on the company's bottom line than the improvement in revenues due to the reopening," he added.

Bonds

The rate hike could be a double-edged sword to bonds, whether corporate or government-issued.

"For the existing holders of bonds, as interest rates move higher, the value of their bonds will go down. For new bond investors, the can enjoy higher rates," Enriquez of SunLife said.

Economy

As it is, the hard part is just starting for the BSP as monetary authorities would need to make sure that the rate hikes are just enough to slow the economy to allow high prices to cool down without throwing the Philippines to recession again.

"This (rate increase) translates to a lower number of firms doing expansionary activities and less households making purchases of real estate or durable goods," Nicholas Mapa, senior economist at ING Bank, said.

"The slower pace of economic activity translates to lower incomes, fewer jobs and an overall slowdown of the economy,” Mapa added.

Neri pointed out that rate hikes may temper the local currency’s weakness as the higher yields could attract foreign investors who would exchange their dollars for peso so they can invest here.

A stronger peso, in turn, can lower import costs and help ease inflation. "If so, then consumers are better off because they don't have to suffer as much from imported inflation including which are felt in petroleum, energy and food products," Neri said.

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