Bangko Sentral ng Pilipinas Governor Benjamin Diokno announced last week the lifting of the central bank’s key policy rates for the first time in three years. PHOTO BY JOHN RYAN BALDEMOR
Bangko Sentral ng Pilipinas Governor Benjamin Diokno announced last week the lifting of the central bank’s key policy rates for the first time in three years. PHOTO BY JOHN RYAN BALDEMOR

CITING improved economic growth and rising inflation, the country's monetary authorities have finally raised the central bank's benchmark interest rates for the first time in three years.

Effective last May 20, the policy-making Monetary Board hiked overnight borrowing, lending and deposit rates by 25 basis points to 2.25 percent, 1.75 percent and 2.75 percent, respectively.

While Governor Benjamin Diokno of the Bangko Sentral ng Pilipinas said monetary authorities believe that raising the interest rate at the right time will help prevent future second-round effects and temper inflation expectations, the real question is what this latest development means for the general public.

We asked some of the country's economic experts, and the following is what they had to say:

Get the latest news
delivered to your inbox
Sign up for The Manila Times’ daily newsletters
By signing up with an email address, I acknowledge that I have read and agree to the Terms of Service and Privacy Policy.

"Higher local policy rate could lead to some pick up borrowing/financing costs for consumers, businesses [including some listed companies] and other institutions," said Rizal Commercial Banking Corp. chief economist Michael Ricafort.

Senior economist Nicholas Antonio Mapa of ING Bank Manila noted that policy rate hikes have a direct impact on people's economic lives, pointing out that increased borrowing costs make it more expensive to invest or take out new loans.

He emphasized that this would reduce the number of large businesses and the number of households buying real estate and durable goods, and slowing economic activity would drag income, pull down employment and slow down the economy as a whole.

Consumer spending affected

"Lastly, affordable credit has been a pillar not just of investment, but it is consumption as well. Throughout the pandemic, lower rates helped drive a sustained rise in consumer salary loans helping Filipinos continue consumption activity despite the recession," Mapa said.

Higher policy rates, Bank of the Philippine Islands (BPI) head economist Emilio Neri Jr. remarked, will make borrowing more expensive for consumers. Interest rates on their credit cards and home loans, for example, are likely to rise.

"If you think about it, however, a lot of consumers lost their credit line during the pandemic because lenders cannot extend credit to those who don't have jobs or have very little earnings to show their ability to pay. However, because the economy is now bouncing back from the pandemic, a lot of people are actually regaining access to credit again," he noted.

Looking at it from that angle, Neri believes that only people who had access to finance during the pandemic may wind up paying extra interest.

He went on to say that lower rates for class A and B during the pandemic were probably simply gravy to them, and that slightly higher rates will not impact their spending habits. Overall, there isn't much of a loss for borrowers.

Another less typical view, the BPI economist underscored, is that rate hikes assist to buffer the peso's depreciation and hence help to slow inflation.

"If so, then consumers are better off because they don't have to suffer as much from imported inflation including which are felt in petroleum, energy and food products," he explained.

From the standpoint of savers, Neri believes that if the yield on their investments improves, it favors the more conservative investors. Those who are aggressive and buy stocks, for example, may lose if stock market participants believe their preferred listed company's borrowing cost would generate a profit drag.

"However, if the economy's reopening due to lower alert levels is going to boost the revenues of restaurants like Max's or Jollibee, the rate hike may have a smaller impact on the company's bottom line than the improvement in revenues due to the reopening," he highlighted.

Controlling inflation

For his part, Union Bank of the Philippines chief economist Ruben Carlo Asuncion said "in terms of the impact on the general public, monetary policy hikes are meant to take control of inflation from rising further that will be detrimental to the purchasing power of the ordinary person and potentially prevent pressures on economic players especially producers and manufacturers of goods and services."

In the meantime, Security Bank Corp. Assistant Vice President and economist Robert Dan Roces said the policy move highlights how current inflation conditions differ from those in the past; now, inflation is much more threatening and jarring, with demand recovering and commodity prices spiking, while the pandemic remains a constant threat.

"Thus, the action is timely; second-round effects including higher-than-expected wage hikes and transport fare increase petitions provide upsides to the inflation view and therefore the policy move is expected to strike a balance between supporting the growth recovery and shielding consumption from the threat of inflation," he noted.