Lower Loan Rates Timely to Lift Growth

Lowering the interest rates in the Philippines will be timely given the weak growth rate in the first six months of 2019 and the lengthy tit-for-tat between the United States and China that is slowing down the global economy.

I believe cheaper credit rates will complement the moves of our economic managers to pump-prime the economy. There is no question the Philippine economy will recover in the second half of the year and I am very confident it will do so. I can also see much lower inflation rates in the coming months because of the low base factor. This will give consumers higher confidence to spend more and serve as a cue for companies to expand.

The Bangko Sentral ng Pilipinas, in addition, has recently adopted a pro-growth policy after the slower pace of economic expansion in the first and second quarters of the year. I believe it will be better for the economy if the Central Bank reduces the interest rates as early as possible, as the inflation rate has begun to decelerate.

Lower interest rates and pump-priming are a perfect combination to reinvigorate the economy. Fortunately, the Bangko Sentral is moving to lower further the interest rates and reduce the reserve requirement on bank loans. The Monetary Board in May has cut the reserve requirement ratio of universal and commercial banks by 200 basis points to 16 percent from 18 percent to bring more liquidity into the financial market.

The lower reserve requirement has an immediate impact on interest rates. The cut in May will gradually release an additional liquidity of about P230  billion into the financial system based on the P11.576-trillion deposits held by universal and commercial banks. The additional liquidity, in turn, will result in cheaper credit.

I am glad to hear that the Bangko Sentral has committed to further reduce the bank reserve requirement on banks in step with the objective of the government to lift the economy higher in the coming years. 

Bangko Sentral Governor Benjamin Diokno, during the recent annual conference of the Bank for International Settlements, held at the Conrad Hotel in Pasay City, said monetary authorities were on track to lower the reserve requirement ratios of banks from the current 16 percent to a single-digit level four years from now.

“We will continue to pursue the reduction of reserve requirements from the current 16 percent to single digit by 2023 to promote a more efficient financial system,” Diokno told conference participants. “We expect that all these will aid in the further development of Philippine capital markets by fostering money market transactions and active liquidity management by Philippine banks.” 

Cheaper credit in the Philippines will lower the cost of operations and spur more companies to expand. Our economic managers agree that lower interest rates is a boon to economic growth. The Monetary Board on August 8 cut the overnight borrowing rate by 25 basis points to 4.25 percent as a result of the low inflation in the same month and the slower economic growth.

Socioeconomic Planning Secretary Ernesto Pernia has expressed optimism that the Bangko Sentral under the helm of Governor Benjamin Diokno would do more to prop up the economy. “I’m sure the BSP will do something…Diokno knows it by now. He is a pro-growth Central Bank governor…I’m quite optimistic he will do the right thing,” said Pernia.

Even foreign banks are upbeat on the Philippine economy despite a weak performance in the first half of the year. ING Bank, for one, expects the Philippine economy to recover with a 6.4-percent growth in the second half as the government accelerates infrastructure spending.

ING, in its latest economic and financial analysis report on August 19, believes the Philippine economy still has a chance to reach the low end of the target range of 6 percent to 7 percent this year.

The Philippines, it said, would continue to outperform other economies in the Asean in the third quarter by growing 6.4 percent. The projection is in sync with Pernia’s assessment that the economy needs to grow by at least 6.4 percent in the second half to reach the low-end of the government’s target range.