We take exception to some reports in the local press that the recent increases in the BSP’s policy interest rates by 100 basis points have contributed to the rise in banks’ cost of funds. This claim has no basis and may even convince the market to believe market interest rates have to increase.
It is true that the 100 basis-point upward adjustment applies on both BSP borrowing and lending rates to the banks which lend to and borrow from the BSP. However, the increases in these key BSP overnight rates do not necessarily translate directly into higher cost of funds for the banks.
This is because the 100-basis point rise in the BSP overnight reverse repurchase (RRP) rate does not represent an added cost, but rather additional income to banks with excess funds that are lending to the BSP. Meanwhile, the 100-basis point rise in the BSP repurchase (RP) rate is a cost to borrowing banks with liquidity needs. A comparison of the total transaction volumes for the two facilities shows that the BSP borrowing (banks’ lending) transactions in the RRP window (with transactions of P380.8 billion and P349.9 billion during the second week and third week of May, respectively) far exceeded those of the BSP lending (banks’ borrowing) transactions in the RP window (with P1.6 billion and P1.9 billion). On 22 May, there were no transactions in both the RP and RRP windows. Thus, the rise in the BSP overnight rates should not affect the funding cost of banks. Rather, it should in fact enchance the banks’ bottomlines because the BSP is shouldering the cost of adjustment as mandated by its charter given the changing monetary conditions.
More important, banks’ cost of funds is primarily determined by deposit rates, which have not moved significantly in may when the BSP rates were raised. In fact, during the first three weeks of May, the time deposit rate that banks pay (all maturities) fell from 8.8 percent (1-5 May) to 8.3 percent (8-12 and 15-19 May). The prime lending rate has risen slightly, nonetheless, from 11.2695 percent in 8-12 May to 11.2727 percent in 15-19 May.
Movements in the Overnight Interbank Call Loan (IBCL) rate also support the view that the increase in BSP overnight rates does not necessarily raise banks’ cost of funds. The average IBCL rate went up by 54.3 basis points from 8-12 May to 15-19 May, thereby raising both the cost of overnight funds of borrowing banks as well as the income of lending banks. Even as the IBCL rate exceeded the RRP rate, the volume of transactions in the overnight IBCL market for borrowing banks was lower at P24.767 billion (8-12 May) and P20.354 billion (15-19 May) than the volume in the BSP RRP window. On balance, therefore, the overall banks’ cost of funds should not increase as a result of upward adjustments in BSP overnight rates. Prospective increases in lending rates would be attributed to other factors such as higher risk.
The Bangko Sentral reiterates its commitment to continue supporting an interest rate policy consistent with price stability and broadly stable financial market conditions.