Rising Federal Reserve Rate Hike and Its effect to the Philippines  

evolution of Philippine Money and its history

The Bangko Sentral ng Pilipinas (BSP) provided another hike for interest rates by half a percent last September 22 to maintain a sinking peso and reduce the impact on imported inflation as it grows potentially faster than anticipated. Following that, Inflation is still expected to exceed the higher end of the 2%-4% goal range in 2022, at 5.6%. The prediction for 2023 has also been raised to 4.1%, but the forecast for 2024 has been reduced to 3%.

The BSP rate hike comes as the Philippine peso fell to P58 per dollar, its lowest level ever. The Philippines peso has lost more than 11% of its value this year, making it one of Asia’s worst-performing currencies. Its dismal performance versus the US (United States) dollar, aided by another 75-basis point increase from the Federal Reserve on Wednesday, has resulted in a record trade imbalance and increased inflation.

Following the United States Federal Reserve’s, sometimes known as the “Fed” bold 75 basis point raise, the main policy rate is now at 4.25%, as expected by economists. This is a response to rising domestic inflation. The Fed reaffirmed that it might boost interest rates further. Rising interest rates by the US Federal Reserve and other global central banks obviously have a substantial influence on Asia. Policymakers in the area will need to tread cautiously to find the proper policy mix for their economies, with a particular focus on assisting the poor and vulnerable.

Read Also: Effect of High Inflation Rates on Middle Class Filipinos | Bria Homes

Why is it Necessary for BSP to Hike Interest Rate

Central banks, such as the Philippines’ BSP, hikes interest rates to limit the pace of inflation, resulting in trade’s price stability. The increase in the central bank’s interest rate raises the lower limit for lending rates to businesses and individuals, discouraging consumption and investment.

Hence as per the Fed, they had to increase interest rates as a response to last year’s low interest rates and increased government spending in response to the pandemic which led in a quick recovery in demand and a tighter labor market in the United States last year, amplifying the inflationary consequences of supply chain disruptions. Russia’s invasion of Ukraine pushed up oil and food costs, adding to inflation.

In addition, the Fed hiked a newly record history of  interest rates for the fourth time in a row in July 2022. This is its most aggressive hike cycle since 1981 and borrowing prices have already reached their highest level since 2019. Inflation fell in July, but the drop does not appear to be convincing enough for the Fed to relinquish its grip. Indeed, Chairman Jerome Powell has recently pushed back against the notion that the Fed will soon adopt a less aggressive approach. As a result, the federal funds rate is projected to rise further, especially given the newly reported core inflation figures. On the other hand, the European Central Bank hiked interest rates in July and September, as well.

How Does it Affect Other Countries?

The Rising interest rates of the fed reduces global liquidity, which may stymie not just the Philippines but the whole Asia recovery in a variety of ways. A tighter credit climate raises borrowing rates for enterprises, lowering profitability and investment incentives. As borrowing prices rise, people become less willing to spend, particularly on durable items and housing. Softening demand and slowing global development pose difficulties for Asian manufacturing and exports.

Read Also: What is the Impact of Inflation on Interest Rates? | Bria Homes

In line with this, Monetary tightening in the United States has caused investors to withdraw their funds from Asian countries particularly the Philippines, causing currency depreciation in most of the economies. Sharp currency depreciation often raises inflationary pressures through increased import costs for food and energy, worsens the current account deficit, and may result in governments unable to pay for vital imports or service external debts. Policymakers in the area must be careful and watchful, especially when large or rapidly expanding debt burdens are exacerbating economic and financial vulnerabilities. Economies with a greater reliance on external creditors in dollar-denominated debt are already facing increased service costs and cash shortages.

Asia’s developing countries will not be immune to the implications of monetary tightening in the United States and other big economies, but the region is well-positioned to deal with the consequences. Most regional economies have adopted prudent macroeconomic policies in recent decades, particularly since the Asian Financial Crisis, including flexible exchange rates to deal with external shocks, active monetary policy to contain inflation, and measured fiscal policy to keep public debts within reasonable and sustainable levels. These steps, together with ongoing efforts to reform the social security system, will be important in the coming months and years.

Overall, this demonstrates that greater inflation linked with commodity price rises provides difficult problems to monetary planners, forcing them to balance the two competing aims of price stability and higher growth. Given the very inadequate economic recovery from the COVID-19 crisis, most of Asia’s emerging countries are today facing serious problems. Central banks in the area should be watchful and act quickly to prevent sustained increases in inflation, which might compromise the goal of price stability while also slowing the recovery.

How Will This Affect Us Individually?

 1. Credit Card Interest is Increasing

The greater the interest rate on your credit card amount, the more costly it is to carry that debt. Your credit card debt gets more expensive when the central bank raises interest rates. This is because interest rates on consumer debt, such as holding a credit card load, tend to increase in lockstep with the BSP’s rate. This important interest rate influences the rates that commercial banks charge one another for short-term loans. A higher BSP funds rate entails greater borrowing costs, which may diminish demand for money from banks and other financial organizations.

 2. Banks Interest in Savings Deposit Increases

Although BSP funds and deposit rates have no actual direct relationship. Interest rate increases encourage individuals to save, but banks will need time to implement increased deposit rates. It is wise to check with your bank to see whether deposit rates have increased. However, higher inflation cancels out this gain.

If you are searching for a better yield, investing in digital banks or credit union may be your best alternative. Online banks, smaller banks, and credit unions frequently provide higher returns than large banks and have increased rates more quickly as they compete for deposits.

Read Also: Should you start saving with Digital Banks? | Bria Homes

3. Loans and mortgages are growing more costly.

Current rate increases have no effect on your vehicle and home loans if they are fixed-rate. However, new loans or loans with variable interest rates will be more expensive. Another rate hike by the BSP means that anyone borrowing to buy a home or tap into existing home equity will most certainly face higher housing costs in the coming months.

If you want to use financing to buy a significant purchase, such as a house or automobile, expect to pay more in interest. While this is not ideal for people looking to buy a home, it is believed that you should not time the market. If it makes financial sense for you to purchase a property and you can afford the monthly payment, even at a higher interest rate, you should go through with your plan.