BSP keeps easing cycle: Banks slash interest rates by 210 basis points

By Lawrence Agcaoili (The Philippine Star) Updated December 20, 2009 12:00 AM

MANILA, Philippines - Corporate and individual borrowers have been enjoying lower rates as banks have slashed interest rates by 2.1 percentage points since the Bangko Sentral ng Pilipinas (BSP) started its easing cycle to boost the slackening domestic economy.

BSP Deputy Governor Diwa Guinigundo said in an interview with reporters that banks have reduced their borrowing rates by 210 basis points equivalent to a pass-through rate of more than 100 percent.

“Banks have been more accommodative both in the corporate and households,” Guinigundo stressed.

Pass through is defined as the ratio between the change in the lending rate and the change in the policy rate since the beginning of the easing cycle.

The central bank’s Monetary Board has slashed key policy rates by 200 basis points from December 2008 to July this year as part of easing measures to boost the country’s slackening domestic economy.

This brought the overnight borrowing rate to a record low of four percent from six percent and the overnight lending rate to six percent from eight percent.

Despite the huge reduction in borrowing rates, latest data showed that bank lending growth continued to fall to 4.7 percent in end-October from a growth of 5.9 percent in end-September.

“They (banks) continue to be less risk averse, in other words, they know and they are convinced that it pays to lend out at this point, without having to tighten their lending standards,” Guinigundo said.

Guinigundo said authorities have to be conscious of the possible risks of having prolonged very liquid situation and low interest rates.

Monetary authorities are likely to lift liquidity enhancing measures before raising key policy rates once it implements an exit strategy in light of the global economic recovery.

Just the other day, the central bank has raised its inflation forecast to 3.3 percent this year from 3.28 percent and reduced the projection next year to four percent from 4.02 percent.

“Inflation is likely to come in at less than the midpoint of the target range this year and next year,” Guinigundo said.

The BSP’s inflation target is 2.5 percent to 4.5 percent this year and 3.5 percent to 5.5 percent next year.

In a recent survey conducted by the International Monetary Fund (IMF), the Philippines emerged as the third fastest country and third largest in Asia in terms of passing on to the consumers lower interest rates brought about by the easing cycle of central banks to boost the slackening global economy.

Data showed that the Philippines emerged as the third largest in terms of interest rate pass-through with almost 70 percent as of August next to Australia’s 90+ percent and Malaysia’s 80+ percent.