Interest cuts are forthcoming

Regarding interest cuts, there were two contradicting predictions made earlier this year.  In the second week of April, Fitch Ratings said then that the Bangko Sentral ng Pilipinas (BSP), amid easing inflation, was expected to “slash interest rates by as much as 100 basis points this year.” It further said then that it could “support the growth of the country’s banking sector in the next two years.”

Then, two months after (sometime June), Sanjay Mathur (Chief Economist for Southeast Asia and India at ANZ Research) reported that “rate cuts in the Philippines are off the table this year.” He simply echoed the same sentiments from other foreign economists that the “BSP is unlikely to slash interest rates this year as domestic inflation is still not low enough to warrant a rate cut.”

Whether these predictions were made purely based on what obtained in the country then or what they perceived the future shall be, we do not know. The fact is, historically, the BSP’s past decisions were mere reactions to what the US Fed did. The truth is, if the US Fed increases rates, the BSP will do the same. If the US Fed cuts, BSP will do exactly the same.

Then, on August 14, the BSP announced that it will “cut policy rates for the first time in nearly four years amid an improving inflation outlook.” While the justification sounds valid, the fact remains that this, as has always been, is a reaction of the US Fed’s moves. The first question now is when? From the looks of it, when the US Fed makes its move.

Notably, the US Fed Chair Jerome Powell “signaled during a speech on Friday that interest rate cuts are coming.” In his keenly anticipated remarks Friday at the Jackson Hole Economic Policy Symposium, Powell said the "time has come for policy rates to adjust" as inflation alleviated and, after months of job growth, the labor market has cooled down. It wasn’t clear though as to when and what’s the pace of rate cuts shall be. Some investors and pundits though are expecting interest cuts as much as “one-and-a-half percentage points from its benchmark fed funds rate by the end of 2024.”

In us, as has always been, whatever the US Fed does, we simply follow. So, the most logical thing to do is, wait and see what it (US Fed) does.

By the way, why is interest cut important? Taking off from where we are right now, let us look into why, in the first place, there were previous rate hikes. It was mainly to slow down inflation. True enough, raising rates shall slow down inflation as borrowing will become expensive. However, those who are already indebted (whether businessmen or ordinary workers with mortgages) will bear the burden of increased borrowing costs (as banks will be repricing borrowers’ loans).

Thus, business expansions will be stalled and some will fold up due to high debt-servicing costs.  Consequently, the economy shrinks and the probability that it will lead to recession and joblessness becomes imminent. Lest we forget, in decade 2000s, the Great Recession (December 2007-June 2009) ensued. It was caused by the housing bubble in the USA which resulted to record foreclosures. Then, a financial crisis flung markets worldwide into a nosedive. This was also the time that oil prices rose to record highs in mid-2008 and then crashed towards the end of the year. As both manufacturing activities and demands for consumer goods in the USA slowed down, unemployment rate throughout the world skyrocketed.

Indeed, with lower interest rate, people will tend to borrow money to make huge purchases.  Consumer spending will surely rise as people will borrow money to purchase cars, houses, appliances, etc. On the other hand, businessmen will certainly be in expansion mode. Therefore, expect a construction boom. The manufacturing sector will certainly have a heyday as demand for construction materials goes up. Purchases of raw materials for processing goods will, likewise, increase too.

Consequently, since interest cuts are expected to happen towards the end of the year, it would be safe to assume that it won’t affect much the country’s adjusted economic targets this year of 6% to 7%.

In the meantime, we just have to bear the elevated costs of our essential goods as inflation (though eased a bit) still rages on and accept the fact that borrowing costs will remain high, for the time being, and will add up further to our financial woes.