Borrowers of money from banks, be they individuals or corporations, are now feeling the impact of higher interest rates as a result of recent increases in the Bangko Sentral ng Pilipinas’ (BSP) benchmark policy rate.
Since May, the Monetary Board has raised 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 to 3.75 percent.
“Clearly, it [the policy rate hikes] will make the borrowing cost higher,” BSP Governor Felipe Medalla said in a briefing. “In fact they [interest rates on bank loans] have already gone up before we increased the rates.”
Medalla meant that before the 0.5-percentage-point policy rate increase that was announced on Aug. 18, the market had already followed the BSP’s lead when the central bank announced a 0.75-ppt increase on July 14.
“I think the 50-basis-point [or 0.5-ppt] increase will have little effect because markets have already anticipated it, and rates have already gone up,” the BSP chief said.
“What we look at is how the various firms that will be affected will perform,” he added, “For a number of firms —rate increase or no rate increase—judging by their financial statements, they will have a hard time.”
Suffering borrowers
Medalla said that for borrowers that were already struggling, “the picture is red and will get redder.”
However, the number of firms that will add to the number of suffering borrowers is very small.
Medalla said that in the BSP’s sample of over 200 companies, only six firms would go from “yellow to red” alert.
“Clearly it will affect the economy, but this is the trade off,” he said. “If you take a long-run view, the effect on output is actually positive. That is, because we acted now, we don’t have to raise too much later. Postponing it will probably need even bigger adjustments later.”
Funding costs
According to Michael Ricafort, chief economist at the Rizal Commercial Banking Corp., higher policy rates increase the funding costs and, in turn, lead to higher lending rates for business loans, consumer loans such as housing loans/mortgages, auto loans, and salary loans. The same goes for borrowing costs for the government to finance its spending and budget deficit.
Ricafort said 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 include the purchases of commodities such as oil, leading to slower economic growth and some slowdown in inflationary pressures as well, he said.