Higher interest rates seen next year

The Bangko Sentral ng Pilipinas (BSP) warned yesterday interest rates may go up next year if the National Government fails to control its yawning budget shortfall.

"If the National Government continues to allow the budget deficit to swell, the BSP may no longer be able to reduce its overnight rates and may instead have to increase it, especially if the National Government has to borrow domestically to finance its deficit," BSP Governor Rafael B. Buenaventura said yesterday.

"If there’s a substantial financing requirement to finance a higher budget deficit, to be sourced domestically, then this might prevent a further cut in the overnight rates," he added.

However, Bue-naventura said the BSP may be able to bring down its overnight borrowing rate to between 11 percent and 12 percent even if the inflation level reaches eight percent next year provided the budget deficit is within the expected level.Earlier, the International Monetary Fund (IMF) said next year’s budget shortfall could hit a staggering P120 billion if the National Government continues to do nothing about this.

Sources said a high interest rate regime could constrain production because of the high cost of money. "With less goods being produced and demand remaining the same, inflation could also be affected upwards," they said.

When inflation rises, the monetary authority normally responds by tightening further the monetary aggregates even though inflation is due to supply-side factors.

The BSP is trying to bring down interest rates by reducing its overnight borrowing rate.

The Monetary Board is set to discuss today another cut in the BSP’s overnight rate of anywhere from 50 basis points to a full percentage point.

At present, the BSP’s overnight rates stand at 14 percent for borrowing and 16.25 percent for lending.