For the first time in six years, the Bangko Sentral ng Pilipinas (BSP) slashed its benchmark interest rates by 25 basis points during its most recent Monetary Board (MB) meeting, which was held last Thursday, May 9. This move is in line with the market’s expectations as inflation has cooled down  in the recent months — from a peak of 6.7% last September 2018 to a more manageable 3.0% for the month of April 2019. In fact, the BSP Governor Benjamin Diokno even went as far to say that these changes in the policy rates and reserve requirement ratio (RRR) were inevitable (SEE: Rate, RRR cuts inevitable — Diokno, Philstar Global).

Moving forward, more rate cuts are expected in the near future in order to reverse the 175 basis point rate hike that the Bangko Sentral implemented in 2018 to combat the rising inflation rate. More importantly, however, the BSP is seeking to stimulate the Philippine economy, after it posted its slowest quarterly growth rate in the past four years (SEE: Philippine GDP growth drops to 4 year low in Q1 of 2019, Rappler).

These developments should excite current property owners as cuts in interest rates often translate into higher asset prices.

175 Basis Point Rate Hike in 2018
Back in 2018, the Bangko Sentral — under the leadership of the late BSP Governor Nestor A. Espenilla Jr. (SEE: Banking community mourns Bangko Sentral’s Espenilla, Rappler), fired off a series of five interest rate hikes, in a span of just six months. In total, the BSP’s overnight reverse repurchase (RRP) facility rate rose from 3.00% to 4.75% (The history of these changes can be found at http://www.bsp.gov.ph/monetary/monetary.asp). Through this contractionary monetary policy, the BSP hoped to combat and contain the rising inflation, which peaked at 6.7% in September of that year.

The rapid inflation was heavily blamed on the Tax Reform for Acceleration and Inclusion Act of 2018 — or more popularly known as the TRAIN Law (SEE: With inflation, TRAIN suspension still eyed, Business Mirror). The provisions of this law levied additional excise taxes on oil and fuel, which is a major resource used in the creation and transport of goods and services. These additional taxes were ultimately passed on and borne by the general public. In addition, the increase in disposable income created by the personal income tax cuts may have caused the economy to overheat.

Proponents of the TRAIN Law, however, argued otherwise. They countered by saying that there are other factors — aside from the TRAIN, which may have also contributed to the rapidly rising prices. These factors include (1) the rising oil prices in the world market (SEE: How High Can Oil Prices Go?, Forbes) (2) and the rice shortage experienced by the Philippines (SEE: NFA Rice Shortage: Whose fault is it?, Rappler). Regardless of the reason, the rapid inflation experienced in 2018 forced the Bangko Sentral’s hand — leading them to tighten its monetary policy and raise interest rates by 175 basis points.


Expansionary Monetary Policy in 2019
Fast forward to 2019 and the circumstances, which triggered the rate hikes in the past year are now gone.  Oil prices in the world market are expected to decrease due to increased supply (SEE: Oil prices to be lower in 2019 on slower than expected global growth, rising non-OPEC supply, World Bank), while the rice shortage has been addressed by the passage of the rice tariffication law (SEE: Faster importation of rice seen under tariffication law, Rappler). As a result, inflation has significantly cooled down in 2019 as evidenced by the 3.00% inflation rate in April.

However — despite the positive developments with regard to inflation, the BSP is faced with a new set of challenges for 2019. Most pressing of these issues is the economy’s slow growth, which lagged at just 5.6% in the first quarter of 2019 — a far cry from the initial 6.5% to 7.0% estimates. In order to stimulate growth, the Bangko Sentral has begun increasing the liquidity in the market by cutting two rates: (1) overnight reverse repurchase facility rate (RRP) and (2) the reserve requirement ratio (RRR).

The Overnight Reverse Repurchase Facility Rate
The RRP is essentially the interest rate which the Bangko Sentral charges for the overnight funds used and borrowed by private banks. The lower the rate, the greater the liquidity in the financial market as banks are more confident in loaning money to the the public. The increased money supply — in turn, drives down the market interest rates which will ultimately stimulate private investment.

After the most recent rate cut of 25 basis points, the RRP currently stands at 4.50%. The BSP plans to further slash this rate by another 150 basis points to 3.00% in order to bring it back to its pre-2018 figure.

The Reserve Requirement Ratio
The RRR, on the other hand, is the minimum percentage of a bank’s demand deposits, which must be kept with the Banko Sentral at all times. As this ratio decreases, the greater the liquidity in the market as the banks have more available funds to loan out to its clients. The increased money supply would drive down the market interest, which would stimulate private investments.

Currently, the Philippines has one of the highest reserve requirement ratios in the Asia Pacific region at 18%. BSP Governor Benjamin Diokno plans to slash this rate in half within the next five years.

Effects on the Real Estate Market
The Philippine Real Estate Market stands to benefit the most from the increased liquidity in the market as economic theory suggests that asset prices tend to increase as interest rates fall. There are two main reasons for this phenomenon.

First — as interest rates fall, the return of bond investors decreases. As a result, they begin looking for profits elsewhere. One of the alternative investments that they turn to is real estate. Therefore, a decline in interest rates increases the demand for real property, which — in turn — drives up the price.

Second, a decrease in interest rates cuts the costs of investing in real estate — as most property is bought using debt. Therefore,  a fall in interest rates would make it more attractive to invest in property due to the lower financing costs.

In both cases, the lower interest  rates spur private  investment in real estate assets. Therefore, property should be delighted to hear the interest are expected to fall even more in the near future.