BSP says low interest rates may soon be over

The Bangko Sentral ng Pilipinas on Tuesday hinted that the low interest rate regime may soon be over and that banks may well look to the bond market as a major source of finance. BSP Gov. Amando Tetangco Jr. said the impending interest rate increases could actually force companies looking for fresh capital to consider the bond market. “Yes, interest rate hikes may have a dampening effect on the value of the outstanding portfolios of banks, but the bond market remains an attractive source of liquidity for companies," the central bank chief said. He pointed out banks could still rely on fee-based operations by offering new products and services to their clients including micro-, small-, and medium-sized enterprises (MSMEs) as well as overseas Filipino workers (OFWs). “Banks will continue to enjoy fee-based income on these potential structured products (precisely to address possible rate hikes), and other services [for] OFWs and the MSME sector…" he added. The policy-setting Monetary Board is scheduled to meet this Thursday, but economists and analysts said they expect the BSP to keep its policy rates unchanged for the for now. Latest BSP data showed the banking industry’s net profit went up by 22 percent to P40.6 billion in the first half of the year from P33.3 billion a year earlier. But London-based credit rating agency Fitch Ratings said the profitability of Philippine banks will likely decline next year with the increase in interest rates reducing income opportunities from treasury operations. The Monetary Board lowered its policy rates by 200 basis points during December 2008-July 2009 to cushion the economy from the global financial crisis. This brought the overnight borrowing rate to a record low 4 percent and the overnight lending rate to 6 percent. The policy-setting body has kept its key rates unchanged despite the 7.9 percent gross domestic product or GDP growth in the first half of the year because of the benign inflation outlook. Inflation is forecast to average 3.5 percent this year and 3 percent next year, falling within the BSP target of 3.5 percent to 5.5 percent for 2010 and 3 percent to 5 percent for 2011. — VS, GMANews.TV