Interest rates are rising: What does this mean for your loans?

Jessica Fenol, ABS-CBN News

Posted at Mar 22 2018 10:07 AM | Updated as of Dec 13 2018 07:00 AM

People shop at a street market in Divisoria, Manila, Philippines, Dec. 29, 2017. Erik De Castro, Reuters/file 

MANILA - Liezel Cenas, a Filipina collection officer in New Zealand, is computing her salary to pay for potentially higher monthly payments on her condominium, as borrowing costs around the world increase.

Cenas, who quit her banking job in the Philippines to work overseas, currently pays P7,400 a month for her condominium and has 26 years in payments left.

"I have to restructure my budget since it's a fixed expense. I have to look into changing my variable expenses such as clothing and food," the 36-year-old told ABS-CBN News.

The Bangko Sentral ng Pilipinas' Monetary Board will meet on Thursday, with only 6 out of 17 economists polled by Bloomberg expecting an increase.

Analysts expect the BSP to start increasing borrowing costs this year by as much as 100 basis points. The regulator has not raised its benchmark rate since Sept. 2014.

The Federal Reserve raised interest rates on Wednesday (Thursday in Manila) and forecast at least 2 more hikes for 2018, highlighting its growing confidence in the US economy.

Rising borrowing costs could trickle down to consumer loans such as housing and cars, but this would not be felt immediately, analysts said. Competition among banks to lure borrowers also influence their interest-rate setting, they said.

"I wouldn't think we consumers are the victims if it happened. We just have to do our part as citizens to be more wise financially," said Cenas.

TRANSMISSION PERIOD

The transmission period before the Bangko Sentral's move reflects on market rates could take 12 to 24 months, said First Metro Securities consultant Aaron Say.

Aside from the benchmark rate set by the Bangko Sentral, competition also plays a part in consumer loans, Say told ABS-CBN News.

"At the end of the day, increasing rates on the bank level is a business decision," Say said. Consumers are more likely to borrow from those who offer lower rates, he said.

The specter of higher borrowing costs could encourage consumers to pay off their debts, BDO Unibank chief investment officer Jonathan Ravelas told ABS-CBN News. Some may even opt to save money, he said.

Consumers should take into account the projected increase in their income, if any, against the pace of interest rate increases before taking out a loan, said BPI lead economist Jun Neri.

"If their compensation adjustment is expected to rise faster, then there is no need to downgrade the type of vehicle or house," Neri told ABS-CBN News.

"But if the rise in rates will mean tighter budgets, they have to consider a downgrade or an outright postponement of their plans," he said.

Regardless of whether or not interest rates are rising, Say said consumers should always consider the "primordial rule" in borrowing.

"Kapag utang, kailangan ibabangga mo 'yan sa kakayanan mo magbayad. Regardless na tumaas o hindi ang interest rates dapat ‘yung kaya mong bayaran," Say said.

(When borrowing money, you need to measure it against your capacity to pay. Regardless of whether or not interest rates are going up or not, it should be based on your capacity to pay.)

Bangko Sentral Gov. Nestor Espenilla said earlier this month that inflation was "in line with the expectations." The BSP uses inflation as a basis for setting interest rates.

Cenas, the OFW, looks to her banking background to see the bigger picture.

"If rates have to increase, then so be it, as long as it is required to achieve economic equilibrium," she said.