Filipinos crunched by rates, spike in cost of living

GLORIA L. JAPON, a 48-year-old public school teacher from Cavite south of the Philippine capital, admits struggling to pay her housing loan in the face of spiraling prices.

Her household costs have increased as her four children in Grade 4 to second year college started attending face-to-face classes amid decreasing coronavirus infections. “Commodity prices would continue to rise, and there’s nothing I can do about it,” she said by telephone in Filipino.

Inflation might have hit as much as 8.3% last month, the Philippine central bank said, faster than the 14-year record of 8.1% in December.

Ms. Japon said her monthly loan amortization has increased by 6% to P9,600 from 2017. “I was taken aback.”

Interest rates started rising in May due to policy tightening by the Bangko Sentral ng Pilipinas (BSP), Domini S. Velasquez, chief economist at China Banking Corp., said in an e-mail.

The BSP raised borrowing costs by 350 basis points (bps) last year, bringing the key rate to a 14-year high of 5.5% as it tried to tame inflation.

“We could see the effects of higher borrowing costs on exchange rates and demand for securities,” she said. “As interest rates in the US continue to rise, investors are moving their money to US securities to take advantage of higher yields. The increased demand is then causing the dollar to strengthen further against other currencies.”

“The increase in housing loans could be driven by the country’s economic recovery and possibly some borrowers locking in interest rates in expectation of further monetary tightening by the BSP.”

Interest rates on loans, including those for housing and credit cards, are expected to continue going up given the lag in the effects of the central bank’s policy tightening.

“Rate hikes manage inflation expectations as they signal to companies and households that the BSP is taking action to directly slow economic activity, which in turn leads to slower growth,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

“BSP policy actions do not impact inflation or prices per se, but they do impact economic growth indirectly,” he said. “By adjusting settings, the BSP is affecting liquidity, which is oftentimes referred to as the lifeblood of the economy.”

Philippine economic output grew by 7.2% in the fourth quarter, bringing 2022 growth to 7.6% — higher than expected and better than the government’s 6.5-7.5% goal. The government expects growth at 6-7% this year amid a looming global economic slowdown.

The International Monetary Fund (IMF) has said the economy would probably grow by 5% this year, mainly due to the BSP’s monetary tightening. This is higher than its 4.3% estimate for ASEAN-5 and 2.9% for the world.

“If you drain liquidity, you drain the lifeblood of the economy — economic activity slows and fewer people are hired,” Mr. Mapa said. “Fewer jobs created mean less purchasing power and less demand-side pressure, which finally leads to lower prices.”

The effects of monetary tightening are not directly felt because it merely sets into motion a series of events that would likely lead to slower growth, he said. Only then will inflation slow.

If the BSP hiked key rates by 100 bps today, projects and investments that are already in play would likely continue, Mr. Mapa said. But in the next six to 18 months, potential investments that are no longer going to happen — deterred by higher borrowing costs — would mean fewer people will be hired. “Therefore, the lag.”

‘SELF-FULFILLING’

The unemployment rate further eased to 4.2% in November — the lowest in 17 years and equivalent to 2.177 million unemployed Filipinos.

But job quality worsened, with the underemployment rate rising by 0.2 point to 14.4% from a month earlier. Underemployed Filipinos rose by 488,000 to 7.161 million from October.

The same could be said about credit cards, Mr. Mapa said. “Rates for credit cards were capped throughout the pandemic and had not been affected by recent rate hikes, which might explain why spending has been relatively resilient despite higher inflation and rising borrowing costs for all other types of loans,” he said.

He added that as the central bank adjusts the ceiling on credit card charges, there could be a similar slowdown in purchases.

The BSP raised the monthly interest rate ceiling for credit cards to 3% effective this month to reflect its recent policy tightening, after keeping it at 2% for the past two years.

Aside from indirectly affecting consumer demand, policy tightening is crucial to manage inflation expectations, Ms. Velasquez said.

“Inflation expectations have the potential to be self-fulfilling,” she said. “Seeing the BSP’s actions to bring down inflation, the public may be convinced that prices will eventually go down. Thus, people will only factor in modest price increases in their wage and price-setting decisions.”

“If the expectation is inflation will ease in the near term, businesses will not factor in large wage increases in their plans, so they may keep prices of goods and services at the same or just a slightly higher level, keeping actual inflation low,” she added.

Consumers are unlikely to borrow more due to rising interest rates. Bank lending growth slowed to 13.4% in December from a month earlier.

Consumer and business sentiment declined in the fourth quarter due to higher prices and rising interest rates. The consumer confidence index worsened to -14.6% from -12.9% a quarter earlier, while the business confidence index fell to 23.9% from 26.1%.

The central bank expects inflation to average at 4.5% this year, higher than its 2-4% goal, before easing to 2.8% in 2024.

Central bank Governor Felipe M. Medalla has said they would manage inflation expectations, signaling more rate increases in the first quarter. The Monetary Board will hold its first policy review on Feb. 16.

“I’m struggling because I’m the only one working in our family and my husband is jobless,” said Ms. Japon, the teacher. “We need to pay our housing loan for the next 14 years, otherwise I’ll end up suffering later.” – Keisha B. Ta-asan, Reporter