The Bangko Sentral ng Pilipinas (BSP) raised its policy rates anew by 50 basis points, bringing the overnight reverse repurchase (RRP) rates, the cost at which it borrows from banks for a day, to 4.5 percent starting September 28, Friday. This comes after the country’s headline inflation rate hit 6.4 percent in August, a nine-year high.
Through RRPs, the central bank borrows money from banks, helping reduce the money supply and curb inflation. Monetary policy makers believe that high levels of money supply contribute to inflation, exacerbating the impact of supply-side factors such as rising world crude oil prices, rice shortages or bad weather.
One of the effects of raising the BSP’s policy rate is to increase the cost of various kinds of bank loans, including consumer loans for housing, cars and even credit cards. This is apparent from the infographic on this page which tracks the BSP’s policy rates, average bank lending rates and savings rates since the early 2000s. When the BSP’s policy rates go up, bank lending rates also climb higher. Savings rates also go up but not as much.
For example, when the central bank raised RRP rates by 25 basis points 3.5 percent in July, average bank lending rates went up to 6.199 percent from 5.901 percent the previous month, or an increase of 29.8 basis points. In contrast, savings rates went up only slightly to 0.877 percent from 0.795 percent the month before, or an increase of just 8.2 basis points.
Higher bank lending rates discourage people from borrowing money, therefore lessening their ability to spend, which helps stem inflation.
“With supply-side forces expected to continue to drive inflation in the coining months, inflation expectations have remained elevated amid indications of second-round effects,” the Central Bank said in a statement. “Meanwhile, domestic demand conditions have generally held firm, even as the previous monetary policy responses continue to work their way through the economy.”
The Monetary Board previously raised interest rates in early August as a response to the 5.7-percent inflation rate in July. However, due to other factors such as the newly implemented tax reform program and rising global prices of fuel, the country’s inflation rate further surged in August.
“The Monetary Board, therefore, decided to raise the BSP policy interest rate anew to further anchor inflation expectations and to safeguard the inflation target over the policy horizon,” the BSP said.
Pauline Macaraeg is Entrepreneur PH's data journalist. Follow her on Twitter @paulinemacaraeg