BSP shrugs off rate concerns

The Bangko Sentral ng Pilipinas has shrugged off concerns over the potential consequences of adjusting key interest rates to historic lows, maintaining that the benefits will far outweigh the costs.

According to the regulator, the present monetary policy ensures that the Philippine economy will keep a respectable pace of growth despite the global financial problems.

Some economists said a scenario where interest rates were close to or below the prevailing inflation level would have adverse effects.

In September, inflation stood at 3.6 percent and averaged 3.2 percent in the first nine months. The central bank’s overnight borrowing rate, which influences commercial interest rates, was brought to a new record low of 3.5 percent late last month.

If interest rates are very low, economists said, individuals and businesses may be encouraged to secure excessive amounts of loans and engage in too much credit-aided purchases. They cited the likelihood of over-borrowing to fund purchases of residential and other real estate properties, which could cause a bubble in the property market.

Moreover, with very low interest rates—where yields from investments in fixed-income securities may be weak as well—fund owners may be prompted to engage in riskier investment activities.

But the BSP said that there are enough regulatory safeguards to counter the adverse effects of historic low interest rates.

“I assure you, every angle of this issue was discussed at the Monetary Board. Should any adverse impact proceed from this policy choice [of bringing interest rates to new record lows], we believe we have enough tools to manage the collateral impact on liquidity and asset prices,” BSP Deputy Governor Diwa Guinigundo told the Inquirer.

The BSP may adjust the reserve requirement, or the proportion of deposits banks must keep as reserve in the central bank, once borrowing becomes too excessive, he said.

The reserve requirement currently stands at 18 percent.

The BSP also said it could impose stricter limits on extension of bank loans, such as real estate loans, once it becomes necessary.

Last Oct. 25, the BSP cut its key policy rates for the fourth time this year. Officials said the reduction is meant to spur demand for loans which, in turn, will help boost consumption and investments. The BSP said boosting domestic spending is necessary because of global economic problems.

An increase in domestic spending should help keep the economy growing robustly even if export revenues remained anemic due to weak global demand, it added.