Commercial bank lending rates on the rise

BANK LENDING rates have been rising since March following the moves of the Bangko Sentral ng Pilipinas to remove excess liquidity from the system and contain inflation.

In a speech yesterday during a forum organized by the Economic Journalists Association of the Philippines Inc. (EJAP), BSP Deputy Governor Diwa Guinigundo said that bank lending rates have increased by an amount equivalent to 46 percent of the 50-basis-point rate hike so far implemented by the BSP this year.

“The transmission [of the BSP action into bank lending rates] is effective,” he said.

In March, the BSP increased its key policy rates by 25 basis points. The move was followed by another 25-basis-point hike in May.

The rate hikes are intended to influence banks in the country to increase their own interest rates so that liquidity growth, and thus inflation, would be tempered.

The rate hikes were implemented amid the accelerating pace of increase in consumer prices.

Higher interest rates are meant to encourage people to save, and go slow on securing bank loans.

Both are expected to help slow down demand for goods and services, and thus temper inflation.

Besides raising key interest rates by 50 basis points, the BSP also raised in June the reserve requirement for banks.

The reserve requirement, the percentage of deposits that banks must keep as reserves at the BSP, was raised from 19 to 20 percent.

Meantime, Guinigundo said that the two rate hikes and the increase in the reserve requirement are “just the beginning” of the monetary tightening cycle that the BSP had entered into this year.

He said the BSP may complement the recent monetary actions with more actions, such as additional policy rate hikes or further increase in the reserve requirement, depending on inflation.

The central bank wants to limit the average inflation at between 3 and 5 percent this year and next year.

The latest government data showed that inflation hit 4.6 percent in June, bringing the average in the first six months to 4.3 percent, much faster than the average of 3.8 percent in 2010.

The BSP said it would continue to monitor the liquidity situation to make sure that inflation would remain within the official range.