The Bangko Sentral ng Pilipinas (BSP) just recently increased its interest rate by 50 basis points based on a meeting held on September 27. While the interest rate hike did not come as a surprise to everyone, another one might be expected. The unexpected high inflation rate this year has dramatically caused a ripple effect to the economy.
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Monetary authorities are doing their best to control the circulation of money through the use of its key policy rates, 50 basis points being the latest. Another increase is yet to be expected as the release of the September inflation rate is to be announced this October 5. The BSP expects it to be at 6.8% or within to 6.3-7.1%. This is almost twice the inflation rate from previous years and as high as that of the inflation rate on February 2009 at 7.2%.
Last August, the inflation rate reached to 4.8%, beyond the target range of BSP inflation target this year which is 2-4%. While inflation was already a problem earlier this year, more pressures add up from the typhoon in Luzon. It destroyed P26.7 billion worth of crops and P7 billion worth of public infrastructure. This damage has disrupted normal market supply hence the government has taken the initiative to import staple items for such deficit.
Since the release of this year’s inflation rate, the BSP has used its key policy rates as a contractionary measure to control money supply. Probably by now, this question has crossed your mind: How does the BSP control the money supply using its interest rates?
A deep understanding of the matter will somehow help us predict future monetary policies to be used by the BSP and protect our investments from the market changes brought about by it and as the saying goes: An ounce of prevention is better than a pound of cure.
So, Central Banks, in general, uses its key policy rates as a contractionary measure. If it may be explained in simple terms, the interest rate referred herein is that rate which banks borrow money from the government. So, in order to compensate for the interest charged to banks, they naturally charge higher rates to the public. If the BSP decides to increase its rates, the banks have no choice but to increase their rates as well. If this happens, the public is discouraged in borrowing money. This means consumer spending drops and inflation slows.
While our concern this year focuses on the inflation rate, let’s direct our attention first on the other economic fundamentals more particularly the Philippines’ economic growth. From the looks of it, it seems quite obvious enough that with the high inflation rate, we have seen it hit domestic consumption which is one of the main building blocks of our GDP. How can we go bigger, faster and stronger if inflation will eat into inflation. Save as much as you can and try to find more ways on how you can save in this new era in our economy.