BSP’s high interest rates negatively impact borrowers’ sentiment

The Central Bank’s Rate Hikes Affect Loan Growth

The country’s loan growth and borrowers’ inclination to take out new loans have been impacted by the central bank’s series of policy rate increases since the second quarter of 2022.

For most financial consumers, the higher lending rates have put a pause on their borrowing intentions, especially since Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. has signaled anew late Monday, Jan. 22, that the BSP will remain “sufficiently tight for longer” until the inflation rate is averaging comfortably within the two percent to four percent target range.

Following BSP’s 450 basis points (bps) cumulative rate increases since May 2022, lending rates further increased in 2023. Based on central bank data, the overall mean weighted average interest rate or WAIR on big banks’ loans stood at 8.5 percent as of end-June 2023, versus 8.2 percent in March 2020 and 6.1 percent in June 2021.

As of end-November 2023, bank lending grew by seven percent year-on-year, slower than the previous month’s 7.1 percent. Bank lending has decelerated since recording a growth of 10.2 percent in March last year.

Remolona said the policy rate, currently at 6.5 percent, would stay “sufficiently tight for longer” with the evolving upside risks to inflation such as the impact of the Red Sea crisis and the domestic labor condition to price pressures.

Meanwhile, based on the latest BSP Consumer Expectations Survey (CES), for the first quarter 2024 and the next 12 months, consumer optimism weakened across the three indicators and income groups used in the survey.

The CES is based on three component indicators, namely: the country’s economic condition; family’s financial situation; and family income.

Consumers are more hesitant about buying big-ticket items because of higher inflation, interest and unemployment rates, and a weaker peso for the first quarter 2024 and in the next 12 months.

Generally, consumers anticipate that the interest and unemployment rates may increase and the peso may depreciate against the US dollar.

Specifically, the CES showed that consumers expect the inflation rate to average at 6.9 percent for the next 12 months, which is above the upper end of the government target range of two percent to four percent.

Consumers also expect the BSP key rate to remain high.

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