How the Bangko Sentral rate hike can affect you

MANILA, Philippines — As widely expected, the Bangko Sentral ng Pilipinas lifted policy rates for the first time in more than three years to curb rising inflation—a move that is expected to affect not just the country’s corporate world but also household budgets.

During the Monetary Board’s third policy review for the year, the central bank decided to raise the overnight reverse repurchase rate by 25 basis points from a record-low 3.0 percent. Interest rates on overnight lending and deposit facilities were likewise raised accordingly.

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“The Monetary Board believes that a timely increase in the BSP's policy interest rate will help arrest potential second round effects by tempering the buildup in inflation expectations,” Governor Nestor Espenilla said.

“The Monetary Board observes that strong domestic demand allows some scope for a measured adjustment in the policy rate without adversely affecting the country’s economic growth momentum,” he added.

Effects

An emerging economy like the Philippines will naturally see higher interest rates to temper inflationary pressures.

Higher interest rates discourage people from borrowing money and spending, causing a decline in demand which, in turn, cools down inflation and can even slow down the country’s economic growth.

“The impact of the BSP rate hike may actually be minimal because markets have already priced the said rate increase before it actually even happened,” Union Bank of the Philippines chief economist Ruben Carlo Asuncion said.

People with credit cards and auto and home loans are expected to feel a sting from the rate hike.

Meanwhile, entrepreneurs as well as small and medium enterprises, which employ a large number of Filipinos, might hesitate to expand their businesses due to higher borrowing costs for investment activity.

High interest rates also tend to encourage investors to pull out their funds from the stock market and invest them instead in fixed-income securities like bonds.

But it must be noted that there’s a long lag between policy tightening and its impact on the financial system. “Whatever monetary policy action we do now will more likely be felt in 2019 and beyond rather than 2018,” Espenilla said last March.

Nonetheless, rising interest rates might prompt consumers to repay their debts and save money.

Also, even if a bank were to charge more for financing a new home or car, there will always be another lender that will be ready to offer a better deal. Espenilla has said the rate hikes won’t immediately affect consumer loans, as market competition might prompt banks not to follow the BSP's increased borrowing rates.

“There is still momentum for credit growth in general. So, shopping for good deals is adviseable,” Union Bank’s Asuncion said.