Higher policy rates: How are you affected?

The Bangko Sentral ng Pilipinas (BSP) on Thursday delivered an off-cycle policy rate hike, following the back-to-back tightening seen in the past two months.

The rate hike was a surprise, as the Monetary Board of the central bank was not scheduled to meet regarding policy until August 18, 2022.

With the latest adjustment, the overnight reverse repurchase facility was hiked to 3.25%, the overnight deposit facility to 2.75%, and the overnight lending facility to 3.75%.

The latest rates now match the levels seen in February 2020, prior to the impact of COVID-19.

Monetary policy is the central bank’s key to ensure low and stable inflation, which would help the country achieve a balanced and sustainable economic growth.

Under the overnight reverse repurchase facility, the BSP borrows funds from banks, using government securities as collateral. This impacts the country’s money supply, as it shifts money from banks into the central bank.

The overnight deposit facility involves banks depositing their funds with the central bank, effectively removing excess money from the financial system, and taming inflation.

Meanwhile, the overnight lending facility involves the central bank lending money to banks. This would move money from the BSP into banks, which eventually reaches the public. This would boost money supply and credit.

Who benefits from higher rates?

Higher policy rates would mean those with bank savings and investments would be given higher interest rates earned on time deposits, fixed income investments, and securities, among others.

“Higher rates compel money to shift from the real sector (economic activity) to move into the financial sector (banks),” Nicholas Antonio Mapa, senior economist at the ING Bank Manila, said in an email commentary.

“Households will opt to save more and spend less, leading to slower economic activity,” he added.

BSP Governor Felipe Medalla noted, however, that the Philippine economy can still accommodate further tightening, after it grew by 8.3% in the first quarter, the fastest in Southeast Asia.

Mapa said higher rates can also bring in more foreign investors into the Philippines, driving the local currency higher and offset some of the peso’s weakness so far.

Just this Tuesday the peso hit P56.37:$1, its weakest showing against the US dollar in over 17 years since November 5, 2004, when it closed at P56.375:41.

“Any further local policy rate hikes would also be partly a function of how the peso exchange rate behaves and the impact on inflation as well as actual inflation data, going forward,” Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael Ricafort said in a separate mobile message.

However, higher rates would also mean that borrowing would cost more, as this would bring funding costs higher — higher interest payments for housing loans, auto loans, salary loans, small business loans, and multi-purpose loans, among others.

“For the public it will mean securing a loan will be more expensive now and thus investing in a home, new vehicle, or business expansion may have to wait,” ING’s Mapa said.

“Higher local policy rates, to 3.25%, though still below inflation of 6.1%, to increase funding costs and the borrowing costs/financing costs of consumers/households, businesses, government (in view of large government debt since the pandemic), and other institutions,” RCBC’s Ricafort mirrored. —KBK, GMA News