Share prices drop after interest rate hike

The Philippine stock index completed its worst weekly decline in one and a half months after the central bank unexpectedly raised its benchmark interest rate to curb inflation.

Ayala Land Inc. and Philippine Long Distance Telephone Co. (PLDT) fell on concern rising lending costs will dent consumer spending and economic growth.

"Higher borrowing rates will increase corporate costs and consumer prices,’’ said Mike Ordinanza, assistant vice president at Bancommerce Investment Corp. "It will also boost returns from fixed-income investments, which is a disincentive to hold stocks.’’

The Philippine Stock Exchange composite index fell 22.12, or 1.1 percent, to 1,922.50 at the close of trading yesterday. The benchmark, which had its biggest drop this month, closed at its lowest since Sept. 16. It ended the week 1.6 percent lower, its worst weekly performance since the five days ended Sept. 9.

The Bangko Sentral ng Pilipinas on Thursday increased the rate at which it borrows overnight from commercial lenders by a quarter-point to 7.5 percent. Only one of the 14 economists in a Bloomberg survey expected a rate rise.

"The central bank overnight rate hike was the last in a spate of triggers that caused the sell-off," said PCCI Securities president Francisco Liboro. "We have had the overhang of the political melee in the past few months, which kept investors on a short leash."

Liboro said that with long-term investors sidelined, short-term market participants were dominating trading and were preoccupied with political noise generated by bickering between President Arroyo and her opponents.

Ayala Land, the largest property developer, fell 40 centavos, or 4.5 percent, to P8.50, its biggest decline since July 4.

PLDT lost P5, or 0.3 percent, to P1,655, its lowest in almost four weeks.

A Supreme Court decision on Oct. 18 to lift the suspension of a new value-added tax law has also weighed on consumer-related stocks this week. Although the law will help improve government finances, some investors are concerned that it will leave consumers with less money to spend, stalling economic growth.

The law will impose value-added taxes on good and services that were previously exempt, including fuel and electricity. It will also raise the value-added tax rate to 12 percent from 10 percent by January.

"There are fears that the expanded VAT law will result in higher prices and higher inflation, which will restrict consumption,’’ said Robert Cano, head of research at BPI Securities Corp. in Manila. – AP