BSP officials said the recent spike in interest rates was unusual but still normal in a free market, not unlike the occasional volatility in foreign exchange rates.
BSP Deputy Governor Nestor Espenilla said the BSP is keeping an eye on developments in the market but said things appeared to have started to normalize after its knee-jerk reaction to external factors.
"The BSP is prepared to take action to curb volatility," Espenilla said. This is not so different from foreign exchange. We can buy and sell bonds. We know our job."
Holders of unit investment trust funds (UITFs) have been hurt by the surge in local interest rates as the market experienced unusual volatility due to fears of another round of interest rates hike in the US.
"Markets everywhere were affected by the global backlash on US rates," Espenilla said. In addition, "there are some concerns about the revenue shortfall" of the Philippine government.
According to Espenilla, however, the reaction was waning and already, interest rates have gone down after spiking in the previous week. "At the end of the day, its interest rate volatility and equilibrating forces start to kick in," he said.
Espenilla said that interest rates have been slowly going down to levels that even the BSP deemed too low. "We have been expecting a correction and ideally, that kind of correction should happen over time," he said. "In this case, the spike was sudden and that’s what caused all this pain."
However, Espenilla said UITF holders should be assured that market trends were not "gravity-defying" and would eventually search for the underlying fundamentals.
"As everyone knows, our fundamentals have actually improved significantly so there is a firm underlying cause for interest rates to seek a level that is neither too high nor too low," he said.
Banking sources earlier said the increase in interest rates have begun to eat into the principals of investors holding UITFs which replaced common trust funds (CTFs) last year.
The market has been broiling with what sources described as "panic selling" as spiking interest rates started to erode the net asset value of UITFs and have begun to eat into the principal investments.
According to a banking industry source, the problem could create a systemic risk and some banks have reportedly started pulling out to cut losses.
According to one source, about 10 to 15 percent of the principal of these UITFs have been lost in the last two weeks alone and losses could mount in the next few days especially if interest rates continue to go up.
On the other hand, Espenilla said that UITF holders should look at fundamentals before making a decision to pull out and cut losses. "There is also sense in saying that this is something UITF holders can wait out," he said. "Panic selling is never good because you’re reacting emotionally," he said.