BSP steps up interest rates anew to 6%

THE Monetary Board decided Thursday, Feb. 16, 2023, to raise the interest rate by 50 basis points to six percent from 5.5 percent effective Friday, Feb. 17.

Interest rates on the overnight deposit and lending facilities will be set to 5.5 percent and 6.5 percent, respectively.

“In deciding to raise the policy interest rate anew, the Monetary Board noted that the latest baseline inflation forecast path has shifted higher relative to the previous assessment,” said Bangko Sentral ng Pilipinas (BSP) Gov. Felipe Medalla, during the virtual press conference Friday.

January inflation accelerated to 8.7 percent from 8.1 percent in December 2022, the highest annual rate recorded since November 2008, and is higher than the BSP projection of 7.5 to 8.3 percent.

The BSP official said average inflation is projected to breach the upper end of the two to four percent target range at 6.1 percent in 2023, before returning to within target at 3.1 percent in 2024.

Medalla explained that the forecasts were adjusted upwards following the higher-than-expected inflation outturn in January as well as the continued stronger rebound in domestic demand and gross domestic product growth in the fourth quarter of 2022. Both headline and core inflation measures have also continued to increase, indicating a further broadening of price pressures, particularly in services. Meanwhile, inflation expectations have likewise risen further, underscoring the need to preempt the emergence of further second-round effects.

“Given these considerations, the Monetary Board deems a strong follow-through monetary policy response as necessary to reduce the risk of a breach in the inflation target in 2024. An upward adjustment in the policy interest rate would also prevent inflation expectations from drifting further away from the target band,” Medalla said.

Impact

Retailer Robert Go thinks the increase of 50 basis points is huge.

“This is super expensive. This will stunt the growth of business and many ongoing projects that have started will be affected tremendously,” said Go.

He noted that entrepreneurs might postpone embarking on new projects and will adopt a wait-and-see stance. Banks may also withhold giving out loans because of the expensive interest rate. Such a scenario may slow down construction projects, for example, and may cause illiquidity for a trader to buy and sell, which in effect will mute business activities.

High interest rates, according to Kelie Ko, president of Mandaue Chamber of Commerce and Industry (MCCI), will discourage people from spending. Consumers will spend more on budget products rather than luxury items. Businesses, especially those in luxury items or services will have decreased revenues and profits. Thus, they will also cut back on new capital infusions resulting in lower productivity.

“The BSP is doing this hoping that the demand for goods and services will drop causing inflation to fall. This is a balancing act,” Ko said.

Steven Yu, immediate past president of MCCI, said “a 25-basis point adjustment would have been enough since our peak inflation at 8.7 percent is temporary in nature and can be brought down by increasing supply via importation, among other possible interventions.”

“A high interest rate environment will make the business sector retrogress and adopt a wait-and-see attitude. It will lead to a shrunken scope of operations, shedding jobs and gainful employment to control the spiraling costs of the operation. It’s a lose-lose scenario for all,” he said.

But the current interest rate will not yet affect those who are making the real estate investment now, according to Ramero Espina, Primary Homes Inc. vice president for sales and marketing.

Espina said upon the purchase of the property, an investor will still be paying for the equity downpayment which is usually interest-free. The financing interest rate will take effect upon the turnover of the units and a reduction of interest rates three to four years from now is still possible.

“Interest rates do fluctuate but the value of well-located real estate properties will rise steadily over time,” he said.

The BSP, meanwhile, reassured the public that it stands ready to take all necessary policy action to bring inflation to within the two to four percent government target over the medium term, in line with its primary mandate of ensuring price stability. (KOC)