Another interest rate hike
The Bangko Sentral ng Pilipinas (BSP) has long time kept its interest rate at a surprisingly low 3% over the years. However, the recent turnout of events has forced the monetary authorities to increase the said rate to a higher rate in a short span of time. As of today, 29 September 2018, it stands at 4.5%.
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So, why should we be concerned about BSP increasing its interest rate? Simple. It affects everyone. While you’re about to buy a kilo of rice to cook for dinner, ask yourself: How much does a kilo of rice cost? How much was it a week, a month or even a year ago? You will be surprised by the answers. Why? You can hardly notice the price increase.
The primary objective of the BSP is price stability and in order to monitor and keep its promise, it keeps a close eye on the country’s inflation rate. While the inflation rate is not the main indicator of a progressive economic activity, it serves as a make or break deal of a country. The government, market investors, specialists and even the general public are monitoring it because it concerns everyone, directly or indirectly. The effects, however, are felt on a different stage or level.
I’m pretty sure we’re all expecting the inflation rate to go beyond its normal range due to numerous economic factors. The alarming release of the third quarter status of the inflation rate stood at 6.4%. Monetary authorities went on a meeting on 27 September in order to address inflationary concerns. It was expected that the BSP would increase the interest rate by 50 basis points.
For 2018, the interest rate of the BSP started at 3% but on May, it increased by 25 basis points as well as on June. By August, it decided to double its increase to 50 basis points which is quite aggressive since we just started to increase the interest rates this year and more recently, it increased to another 50 basis points. If the inflation rate is still unchanged, it will continue to hike its rates.
Effectiveness of Adjusting the Interest Rate
As mentioned above, the BSP, for a very long time, has not adjusted its interest rates so the question now will certainly boil to its effectiveness. While other contractionary measures can be used to control the economy’s money supply, the BSP is still yet to determine its effectiveness and degree of impact. We’re at the third quarter of the year and we are yet again to assess the economic fundamentals. Will we reach our inflation target for this year? Will the Philippines be one of the fastest growing economies in Southeast Asia? The answers to these questions are still at large. The best thing we can hope for is that the monetary policy taken by the BSP will be effective enough to give us a positive figures at the end of the year.
