MANILA, Philippines—Shrinking real interest rates in the Philippines may prompt the Bangko Sentral ng Pilipinas to finally raise key policy rates when its monetary board meets on March 24.
Real interest rate, which affects actual income generated from savings or investments, is computed as the nominal interest rate less inflation. Since a drop in real interest rate suggests a decline in earnings from savings or investments, it tends to encourage people to spend more.
Inflationary pressures stemming from declining real interest rates could be the factor that would force the BSP to tighten its monetary policy, regulators said.
The country’s key policy rates stand at record lows of 4 and 6 percent for overnight borrowing and lending, respectively. These rates have been in place since July 2009.
“Real interest rates are still positive, but are falling. [Whether real interest rates] are still sufficient to maintain macroeconomic stability is something we [monetary officials] will be addressing in the March 24 monetary board meeting,” BSP Deputy Governor Diwa Guinigundo said.
“Monetary policy will really have to be reviewed in light of all these increases in commodity prices.”
Real interest rates in the country have declined following the increase in inflation reported last February.
The National Statistics Office last week said that annual inflation stood at 4.3 percent in February, accelerating from 3.6 percent in January.
Also, the latest inflation figure exceeded the BSP’s forecast for the month, ranging between 3 and 4.1 percent.
Economists attributed the faster rate of rise in consumer prices to demand- and supply-side factors. They said that rising incomes, resulting from economic recovery, have strengthened demand for goods and services. On the other, rising costs of imported goods, such as oil and selected food products, are pushing overall domestic prices.
The BSP gradually had to bring down key policy rates because of the global economic crisis that peaked in 2009.
Officials said low interest rates were needed to boost consumption and investments. The move allowed the economy to stay afloat.
Other central banks in the region had done the same. But following the global economic recovery in 2010, foreign central banks had since begun raising their respective key policy rates.
Earlier this year, the BSP said that there was no immediate need for it to tighten the country’s monetary policy because inflation in the Philippines seemed manageable, unlike that experienced in other countries.
This time, however, central bank officials have admitted that there is a need to review the existing policy rates and consider a tighter monetary policy.
Some economists expect the BSP to start raising its key rates when its monetary board sits down during its next policy rate-setting meeting on March 24.