MANILA, Philippines - The market is slowly reflecting benchmark cuts made by the Bangko Sentral ng Pilipinas (BSP) earlier in the year, lowering interest rates further with the end in view of supporting domestic growth, a central bank official said.
Citing benign inflation and the need to support growth, BSP’s policy-making Monetary Board has cut key rates by an aggregate of 75 basis points this year, bringing them to new record-lows of 3.75 percent and 5.75 percent for overnight borrowing and lending, respectively.
So far, only 53 percent or roughly 40 basis points have been passed through market interest rates and BSP “expects that there will be further reduction” in the coming months, BSP Deputy Governor Diwa Guinigundo told reporters last Thursday.
BSP slashes rates in a bid to encourage borrowing from consumers, which in turn could use bank credit for consumption and investment. More consumption and investment are expected to propel economic activity and thus, boost growth.
“We expect that there will be further reduction in the market rates because the pass through has not been completed,” Guinigundo said.
Rate adjustments usually have a lag of 12 to 18 months before being fully adopted by the market. Guinigundo said this year’s rate cuts-conducted in January, March and July-could be completely felt in the next seven months.
“For example, in the 25 basis-point cut in July, only 27 percent has so far been passed through... Therefore, we need to see 0.19 percentage-point further decline in market rates,” he explained.
In its policy meeting last Thursday, BSP kept rates steady with Governor Amando Tetangco Jr. citing among others, earlier rate cuts which “continue to work their way through the economy.”
Meanwhile, though lower interest rates could encourage borrowing, they could also trim bank profits. Bank officials, however, declined to comment on this matter.
BDO Unibank Inc. president Nestor Tan, in a text message, said “rate cuts are positive to the economy” when asked to comment on the impact of BSP’s moves to banks’ net income.
For her part, Suzanne Felix, executive director of the Chamber of Thrift Banks, said in a separate text message: “It may be difficult to generalize for the entire industry.”