Lower interest rates

Just this week, amid easing inflation, the Bangko Sentral ng Pilipinas (BSP) is expected to “slash interest rates by as much as 100 basis points this year,” according to Fitch Ratings.  It further said that it could “support the growth of the country’s banking sector in the next two years.”

As in the past, whether this decision was made purely based on what obtains today, we do not know. The fact is, historically, the BSP’s past decisions were mere reactions to what the US Fed did. The truth is, if the US Fed increases rates, the BSP will do the same. Notably, the BSP’s Monetary Board extended its “policy pause for a fourth straight meeting on April 8, after it raised borrowing costs by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.” Well, just as the US Fed, likewise, paused as well.

Earlier this month though, the US Fed also announced the potential cut in interest rates this June. However, just yesterday, as US inflation data revealed that inflation remained hot, it said that the possibility of cutting rates by June looks dim. September though, according to reports, is a big possibility. Everything rests, however, on the inflation data by then. As US Fed’s timing is BSP’s timing too, is it safe to say that we shouldn’t expect rate cuts soon?

By the way, why is interest cut important? Taking off from where we are right now, let us look into why, in the first place, there were previous rate hikes. It was mainly to slow down inflation. True enough, raising rates shall slow down inflation as borrowing will become expensive. However, those who are already indebted (whether businessmen or ordinary workers with mortgages) will bear the burden of increased borrowing costs (as banks will be repricing borrowers’ loans).

Thus, business expansions will be stalled and some will fold up due to high debt-servicing costs. Consequently, the economy shrinks and the probability that it will lead to recession and joblessness becomes imminent. Lest we forget, in decade 2000s, the Great Recession (December 2007-June 2009) ensued. It was caused by the housing bubble in the USA which resulted to record foreclosures. Then, a financial crisis flung markets worldwide into a nosedive. This was also the time that oil prices rose to record highs in mid-2008 and then crashed towards the end of the year. As both manufacturing activities and demands for consumer goods in the USA slowed down, unemployment rate throughout the world skyrocketed.

Clearly, therefore, if rates are reduced, the exact opposite happens. So that, as early as yesterday, Fitch said that despite “moderate compression in margins, the lower interest rate environment and strong economic growth should continue to support the banking sector’s growth prospects over the next 12 to 24 months.”

Indeed, with lower interest rate, people will tend to borrow money to make huge purchases. Consumer spending will surely rise as people will borrow money to purchase cars, houses, appliances, etc. On the other hand, businessmen will certainly be in expansion mode.  Therefore, expect a construction boom. The manufacturing sector will certainly have a heyday as demand for construction materials goes up. Purchases of raw materials for processing goods will, likewise, increase too.

Thus, as Fitch Ratings expected, “credit growth is also likely to pick up this year by 10%.” If realized, this will come out to be faster than the 7% recorded towards the end of last year. The performance of the Philippine banking sector is also expected to be steady this year.

More importantly, Fitch Ratings added that, with “cost growth likely to remain controlled with inflation subsiding,” purchases of raw materials for processing/manufacturing activities will, likewise, increase too. Consequently, employment will certainly rise.

So that, Fitch Ratings said that the country’s gross domestic product is expected “to pick up to 6% to 6.5 % in 2024 and 2025 from the 5.5% expansion in 2023.” This forecast “puts the Philippines among the fastest expanding economies in the region, with growth rates significantly outpacing BBB-rated sovereigns’ median of about 2.9 to 3.2 percent,” it added.