Benchmark Rates

When the world's largest economy raises interest rates, the world typically follows because if other nations don't, their currency will depreciate against the US dollar.

See, the world's largest central banks park their money with those who offer the highest interest rates–because who wouldn't? A 0.75% increase in interest rate doesn't mean a lot to most, but if you're talking about hundreds of billions of dollars, each basis point matters.

Assuming the BSP doesn't follow and increase its benchmark rate, foreign funds would terminate their Philippine peso (Php) investments and convert the Php to US dollars. That's why the Philippine Peso depreciated from 52.412 last June 1 to 54.207 as of June 21–investors sold their Php holdings. A depreciating Philippine peso would, in turn, hurt importers who have to buy US dollars to pay for the products they import, such as cement or oil.

But wait, it's not as simple as the BSP copying what the US Fed does; it has a balancing act. If they raise interest rates, Philippine borrowers also take a hit since most loans are flexible, meaning they follow the Philippine government's borrowing rate plus a certain premium (i.e., 1-year Treasury Bill Rate at the time of repricing + 4.00%). I hope everybody understands that the promo rates in advertisements are only fixed for 1 to 3 years. The interest rate is recalculated after.

For each 25 basis point increase in interest rates, the monthly amortization would increase by approximately Php208 for each million of loan amount. So for a Php5 Mn loan, a 75 bps increase would mean an addition of Php3,125 to the monthly amortization.

The amount doesn't seem like it's too much for Filipinos. That's because the BSP has learned its lesson from the Asian Financial Crisis and has mandated stringent lending standards (e.g., requiring the monthly amortization of a borrower NOT to be more than 60% of monthly income).

In the US, it's a different story. Loans are given more liberally, and the US Fed's 75 basis point hike would hurt many borrowers. Fears of another housing sector collapse are in talks–but that's another story.