When interest rate goes up, expect investments, including the interest rate sensitive consumption expenditures, to fall.
The government placed the country’s inflation rate last month at 6.0 percent.
It is actually lower in Metro Manila at 5.8 percent and higher outside Metro Manila at 6.2 percent.
Last month’s inflation rate is lower than the 6.7 percent inflation rate recorded in each of the two preceding months of September and October.
This is good news.
What is not good is that in the first eleven months of the year, the average inflation rate hovers at 5.2 percent.
In the same eleven months last year, the inflation rate was only 2.8 percent.
In the government’s 2016 Family Income and Expenditure Survey (FIES), the bottom 30 percent of our total number of households had an average annual income of about P111,000.
This amounted to P9,250 a month.
Let us assumed that it had increased to P10,000 a month at the start of the year.
With the 5.2 percent average monthly inflation rate since January to now, the family in the bottom 30 percent could only buy now P9,480 worth of goods and services.
The P520 difference is lost to inflation.
They need that much of increase in income to maintain their standard of living this year.
Based on the same 2015 FIES, the upper 30 percent of our total number of households earned about P42,300 a month.
Again, let us assume that it had gone up to P50,000 a month by the start of the year.
Deducting for the 5.2 percent inflation rate, each family in the upper 30 percent could now buy only P47,400 worth of goods and services.
They lose P2,600 a month to inflation.
Rich and poor, inflation hurts us alike.
The countries inflation rate shows that much of it actually came from the increase in the prices of food.
An average Filipino household spends about 40 percent of its income on food consumed at home and 5 percent consumed outside of home.
The trouble is that the bottom 30 percent spend a greater part of their income on food, most probably at 60 to 70 percent.
With inflation rate much higher in food than the overall inflation rate, the poor must be staggering in hunger from its effect.
As for the upper 30 percent, they probably spent 10 to 20 percent only of their income on food.
Thus, they really are not badly affected by the high prices of food products as the bottom 30 percent.
Add their reduced tax payments because of the Train law, they must be laughing away eating more outside.
As the BSP is wont to say, it fights inflation by raising the interest rate.
With the BSP overnight rate set higher this year by 1.75 percent from 3.00 percent to 4.75 percent, the bank lending rates were also expected to move higher.
Bank lending rates could be twice or thrice higher than the BSP overnight rate, depending on the borrower.
Prime borrowers with very little possibility of default are charged the lowest rate.
When interest rate goes up, expect investments, including the interest rate sensitive consumption expenditures, to fall.
This will lead to the easing up of aggregate demand in the economy, hence, lower inflation rate.
This is true but only after a lag of about a year.
In the short run, the effect of high interest rate is to raise the cost of doing business.
So was it because of the BSP’s move to raise the interest rate that cut down our inflation rate?
That I am not so sure, especially that much of our inflation was cost-push and not demand-pull.
Disclaimer: The comments uploaded on this site do not necessarily represent or reflect the views of management and owner of Cebudailynews. We reserve the right to exclude comments that we deem to be inconsistent with our editorial standards.
