Interest rates continue to drop

MANILA, Philippines - Interest rates have continued to drop for the past 10 months as banks reflected cuts made by the Bangko Sentral ng Pilipinas (BSP), which has remained comfortable of asset prices despite easing anew last Thursday.

Lenders have slashed interest rates by an average of 60 basis points, equivalent to 80 percent of the 75 basis-point cuts conducted earlier in the year, BSP Deputy Governor Diwa Guinigundo said on Thursday.

“The pass-through for the 75 basis-point cut from the beginning of the year up to mid-October is about 80 percent. So 80 percent of 75 basis points, we have seen this has been passed through in terms of lower bank rates,” Guinigundo told reporters.

BSP data showed average bank lending rate at 5.50 percent in August, lower than the 5.91 percent recorded in January and 6.21 percent as of end-2011. This was after BSP trimmed policy rates by 25 basis points each on January, March and July.

Policy rates serve as benchmark for interest rates in bank loans.Lower rates are meant to encourage bank lending, which in turn is expected to boost consumption and investment and contribute to economic growth.

Interest rates are expected to lower further as the full effect of 75-basis-point cut is yet to be reflected and after BSP slashed rates by another 25 basis points last Thursday.

“That (lower rates) would provide additional support to economic growth especially as the global economy remains soft and broadly uncertain,” Guinigundo explained.

 “(This) provides incentive to people to borrow from banks, invest and create economic activity,” the deputy governor said. “(It also) provides additional insurance the possible spillover effects coming from the Europe and the US.”

Guinigundo shrugged off concerns that BSP’s easing may prompt banks to lend beyond their capacity, thus creating bad loans. He also stressed that there is “no strong evidence of stretched valuation in the asset market” as of now.

BSP has been keeping a tight watch on asset prices to avoid asset bubble formation, or a situation when asset rates shot up beyond real market prices as a result of huge demand. Lower borrowing rates are expected to buoy such demand.

 “From the perspective of the PSE (Philippine Stock Exchange), we do not see any misalignment from this point,” Guinigundo said.

“On the real estate market, again, based on the reports that we get, looking at rentals, capital values, residential versus commercial, we are in no way near what we have seen during the Asian financial crisis,” he explained.