Philippine benchmark interest rates for short-term loans jacked up following the Bangko Sentral ng Pilipinas’ (BSP) surprise off-cycle move last week, along with expectations that the central bank could deliver more aggressive tightening.

At Monday's auction of Treasury bills on July 18, the bellwether 91-day Treasury bill rate, which banks use in pricing their loans, accelerated to 2.323 percent from 1.876 percent last week.

But despite the increase, the Bureau of the Treasury still sold the P5 billion worth of three-month debt papers on offer. Investors however were asking for P16.615 billion of the government security or IOU.

Yield on the 182-day T-bill also rose to 3.083 percent from the previous 2.907 percent as investors were willing to buy P8.89 billion of the six-month IOUs. The government, however, awarded only P2.9 billon of the P5 billion program.

Moreover, interest rate on the one-year IOU has risen to 3.258 percent from 2.981 percent last week.
The one-yield debt papers attracted P8.02 billion worth of bids, and the government awarded the full P5 billion on offer.

National Treasurer Rosalia V. de Leon said on Monday, July 18, that the significant increase in government interest rates was expected after the BSP raised benchmark interest rates by 75 basis points to to 3.25 percent effective last Thursday.

“As expected, markets asked for higher rates following 75 basis points off cycle hike by BSP. Another 50 basis points is also now being put on the table as US Federal Reserve turns more aggressive with possible full percentage point to be delivered,” de Leon said.

The latest BSP policy action followed two back-to-back rate increases of 25 basis points each in May and June.

BSP Governor Felipe M. Medalla also signaled further tightening amid growing risks to inflation.

But despite a rising interest rate environment, Finance Secretary Benjamin E. Diokno said the Philippine economy would continue its robust expansion pace this year.

Diokno said the economy, as measured by the gross domestic product (GDP), would “absolutely” grow by 6.5 percent to 7.5 percent this year even with higher interest rates.

“The economy continues to be robust to absorb the recent Monetary Policy rate increase given the favorable expansion of economic activity early this year,” Diokno said.

“Remember the economy was growing at that rate before the pandemic, when policy rate was at 4.00 percent,” Diokno noted. “The BSP simply accelerated the normalization process.”

He also added that the Development Budget Coordination Committee, an inter-agency body tasked to set the country’s macroeconomic assumptions, already anticipated the central bank’s actions.

“The DBCC target range for the GDP growth rate has been set to able to incorporate the various pace of monetary policy normalization by the BSP,” Diokno said.