ECONOMISTS and businessmen are divided on whether they would want the Monetary Board (MB) of the central bank to continue hiking its key policy interest rate at its next fiscal meeting on May 18, 2023, after inflation has remained elevated and bank lending steady following a series of nine successive interest rate hikes since May 2022.
Emilio Neri Jr., lead economist of the Bank of the Philippine Islands (BPI), told SunStar Cebu Monday, May 15, that while the decision is up to the MB, cutting the interest rate is the least prudent move it can do.
Monetary authorities including Finance Secretary Benjamin Diokno have called for a “pause” in the interest rate hikes as the inflation rate eased in the last few months.
The interest rate stands at 6.25 percent amid the April inflation rate of 6.6 percent, a deceleration from the inflation rate of 8.6 percent in February and 7.6 percent in March.
The Bangko Sentral ng Pilipinas (BSP) has been aggressively hiking interest rates in a bid to control inflation that has reached 14-year highs amid a surge in food and energy prices following Russia’s invasion of Ukraine in February 2022 and the West’s response to it that have disrupted global supply chains.
Banks use central bank rates as a benchmark in pricing their loans. When banks increase their rates, this encourages people to spend less and save more. It also discourages businesses from borrowing money from financial institutions, reducing the money in circulation, thus helping to rein in price growth.
BSP Gov. Felipe Medalla refused to comment on Diokno’s statement during the BSP-International Monetary Fund Conference for Financial Systemic Risk in Mactan, Cebu on Monday, choosing to reserve his statements for after the board meeting.
Neri, who also attended the conference in Cebu, said the interest rate will depend on a lot of things including the most recent gross domestic product growth, which stood at 6.4 percent in the first quarter of 2023, April inflation rate of 6.6 percent, and the US Federal Reserve’s recent key interest rate hike by 0.25 percentage points—its 10th hike in 14 months.
“It seems the market is anticipating they (BSP) are in their last hike and they will pause for a while. The market is pricing a cut in September. But the market keeps changing its mind, globally, changing its expectations based on the futures market,” said Neri.
High-interest rate
The lead economist said the BSP can still choose to increase the interest rate by 25 basis points (bps) or to 6.5 percent to match the inflation rate, especially since core inflation remains high at 7.9 percent.
“It’s hard to say if it’s really prudent to pause already. Kasi galing ka sa (Because you came from) two (percent). Then you raised it 6.25 (percent). Naghihinayang ka pa to add 25 basis points. Bakit hindi mo na lang gawin (Why don’t you just do it) to follow through to really manage inflation, para lalong marestore ang (to further restore the) credibility ng BSP as a fighter of inflation?” said Neri.
“If it’s clear that the core (inflation) is starting to go down, it’s clear together with headline (inflation) is starting to really go down and approach the four percent target, they can pause. Once they are within the target, they can even consider cutting the rates,” he added.
Headline inflation measures changes in the cost of living based on movements in the prices of a specific basket of major commodities, and refers to the year-on-year change in the Consumer Price Index (CPI). Core inflation excludes food and energy items, in order to capture the general trend in prices by filtering out the effects of temporary shocks on the CPI, according to the Philippine Statistics Authority.
Even then, Neri said the BSP should take necessary precautions before cutting the interest rate such as cutting the reserve requirements of financial institutions from 12 to nine percent and bring up the international reserves to $110 billion or $120 billion.
The country’s gross international reserves was at $101.5 billion at the end of April.
Loan growth
The lead economist notes that despite the high interest rate, BPI has seen a surprising increase in credit card loans at 35 percent and personal loans at 90 percent.
He said that even though the interest rates in the Covid-19 pandemic years were very low, people had no access to credit because many of them were unemployed or lost their employment.
With the employment rate reaching higher than the pre-pandemic state, the public may now have more access to credit and no longer feel the higher interest rates.
Lending by big banks grew 10.1 percent in March to P10.76 trillion, according to the BSP.
Lending growth was 10.4 percent in January and 10 percent in February, decelerating from 13.4 percent in December 2022, and 13.9 percent growth in November 2022.
Business sentiment
Although business owners prefer lower interest rates to expand their businesses, they still expect a small interest rate hike due to still higher-than-target inflation figures.
“We understand that the Bangko Sentral ng Pilipinas has to manage our macroeconomic policy so that inflation can also come down. In the long run, businesses will flourish when our economic growth is managed at a steady pace,” said Charles Kenneth Co, president of the Cebu Chamber of Commerce and Industry.
The BSP has hiked the policy rate by a cumulative 425 basis points to 6.25 percent since May last year to tame inflation and stabilize the peso.
Not welcome
“As of now, there are mixed predictions and outlook from different economists and industry experts, but the business sector certainly does not welcome any more hikes as it is quite high already, and our inflation is induced by supply side issues which can be remedied by (temporarily) increasing imports,” said entrepreneur Steven Yu, former president of the Mandaue Chamber of Commerce and Industry.
According to Yu, a pause is warranted to avoid plunging the economy into a deep recession.
“A recession will impede the post-pandemic recovery of businesses, and shed jobs,” he said. “A high interest rate environment is bad for business and some costs are passed on to consumers too. Overall, it is a negative circularity of increasing costs and a suffering populace.”
With the high interest rate environment, Yu said businesses cut costs, increase efficiency, put on hold any expansion plans, and to a certain extent, pass on some costs through increased prices.
In a separate interview, former Rural Bankers Association of the Philippines president Albert Concha Jr. said he expected interest rates to start going down as the inflation rate has started to ease.
“I hope to see the increases (of interest rates) tapering off as latest inflation figures show improvement. Hopefully, the BSP this year ceases to increase rates after we are able to control inflation. (Then) we can go back to the good times where interest rates are very low to encourage businesses to borrow and expand,” said Concha, president of the Rural Bank of Rizal.
Like BPI’s Neri, Concha noted continuing lending activities amid the high interest rate environment in rural areas.
“Surprisingly, in the areas where we operate, we are able to maintain our core borrowers, and we expect to grow with the opening of our first Cebu City branch. Our borrowers are not rate sensitive,” he said, noting that rural banks are filling the gaps not served between commercial banks and lending investors. (with CTL)