Questions of Policies
Interest rates
By Honesto General
Philippine Daily Inquirer
First Posted 02:50:00 01/14/2009
Filed Under: Interest Rates, World Financial Crisis, Central Banks
As everyone knows, this financial turmoil has spread worldwide. To avoid a repeat of the 1929 Great Depression, and with the contraction of the economies of such industrial powerhouses such as the United States, Japan, the United Kingdom and Germany, to mention only four, central banks around the globe have been slashing interest rates like mad.
In the United States and other major parts of the world, central bank interest rates are near vanishing points. The Bank of England brought down its rate to 1.5 percent, the lowest in its 365-year history.
I understand (mind you, I am no economist, just a lousy insurance broker) the aim is to spur demand for products and services by putting money into the hands of the consumer who would rather keep under his pillow whatever little money he has.
To drum up sales, the retail trade industry is offering huge discounts.
In the midst of this tumultuous sea, what is our central bank, the Bangko Sentral ng Pilipinas, doing? It has slashed overnight rates by half-percent.
Big deal. Oh, sure, the borrowing bank saves that precious half-percent and, as a result, the bank has more money to lend. But, at the other end of the transaction, the lending bank loses the same half-percent and, as a result, the bank has less money to lend. In the end, the two transactions cancel each other out. Surely, even the minor accounting clerks at Bangko Sentral see through this balancing act.
But, Bangko Sentral’s basic rates are high.
Bangko Sentral keeps saying it uses high interest rates to fight inflation. But, isn’t inflation the result of too much money in circulation and not enough to spend it on? But why should industry raise its output if there is no demand, because the consumer finds it too expensive to borrow money?
If there is demand, the best way to keep prices down is to encourage competition. In the searing sunlight of an open market, prices will shrink.
Take the case of insurance, particularly fire insurance, probably the most competitive business ever invented. In the Philippines, fire insurance rates today are about one-fifth what they were 15 years ago, and still dropping.
As a result, more and more people buy fire insurance than ever before. Today, the fire insurance industry is more robust than ever. Rates are down, total premium volume is up. Losses are down. Everybody happy.
Once and for all, Bangko Sentral should put an end to this regime of high interest rates. With lower interest rate, the banks will have more business than ever before.
Finally, the full name of Bangko Sentral is Bangko Sentral ng Pilipinas. First and foremost, it should serve the interests of the Filipino people, not the banking sector.
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