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Further Interest Rate Cuts Will Boost GDP

Our economic managers and monetary authorities are now in a better position to calibrate the benchmark borrowing and lending rates in support of household spending and investments, with the inflation rate falling below 1 percent for the first time in 40 months.


The Philippine Statistics Authority early this month reported that the inflation rate, or the movement in consumer prices, settled at 0.9 percent in September, the lowest in more than three years. A combination of base effect and the lifting of quantitative restriction on rice imports contributed to the low inflation last month. It was a significant improvement from 6.7 percent in September last year when an artificial shortage of rice hit the local market.


The latest inflation figure presents a good opportunity for the monetary authorities to stimulate economic growth that lagged in the first two quarters of 2019. It should also encourage the Bangko Sentral ng Pilipinas (BSP) to unleash more liquidity into the financial market.


Data show that the inflation rate
averaged 2.8 percent in the first nine months of 2019, below the government’s midpoint of the target range of 2 percent to 4 percent for the year.


While the BSP’s Monetary Board already reduced the overnight borrowing rate to 4 percent on September 26, the full impact of the adjustment has yet to trickle down to the bank branch level. It seems that banks are tentative in following the benchmark rates because of the gradual adjustment felt by the financial system. But I believe that there is still room for further reduction in interest rates given the benign inflation outlook and the need to push up the gross domestic product growth above the 6-percent level.


The BSP last year was very aggressive in raising the interest rates to check the rising inflation rate. It adjusted the borrowing rate by a total of 175 basis points in 2018. While this helped temper the increase in consumer prices, it also had an impact of restraining economic growth in the first two quarters of 2019.


As a result, the GDP growth averaged 5.6 percent in the first two quarters of this year, below the government’s target range of 6 percent to 7 percent. Sensing the need to support economic growth, the Monetary Board, led by BSP Governor Benjamin Diokno, gradually reduced the benchmark interest rates, as well as the reserve requirement ratios (RRR) of commercial banks.


The Monetary Board on October 24 reduced the RRR of banks by another 100 basis points or 1 percentage point to 14 percent, releasing more liquidity into the market, which hopefully would translate into higher lending to businesses and households.


While these policy measures are expected to drive spending and investments, the BSP has the capability to be a bit more aggressive this time if it really wants to support GDP growth. It should decrease the interest rates as quickly as it increased them last year to enable the financial market to feel the full impact.


Businessmen are keenly awaiting lower interest rates to make their investment decisions, such as expansion and hiring of more personnel. Infrastructure and construction companies also rely on interest rates to determine the phase of their project development.


The door is still open for further rate reduction if one is to consider the 0.9-percent inflation rate in September that will likely continue through October before slightly picking up toward the holiday season.


We hope that the BSP will still consider further rate cuts in the fourth quarter of 2019 and in the first quarter of 2020. Such rate cuts will be positive for the Philippine economy and government infrastructure projects that could only take off if supported by low-interest loans from banks.


I believe there would be no dramatic increase in inflation in the coming months, like what transpired last year, after the government put in place reform measures such as the liberalization of rice imports. And I don’t see a radical increase in the prices of other basic commodities as the Department of Trade and Industry is on top of the situation.


With inflation concerns already well managed, we should work together toward bringing the GDP growth level to above 6 percent so that we can focus more on making our economy more competitive and creating more jobs for our people.