Interest Rates

Group 3:
Jade N. Mendoza Edmonn Soriano
Liza Barcelona Rose Ann Abat
Cristal Adolacion Kyla Laconsay
Kaira Abagat Nica Cadiang
 - are the price paid for

erest rates the use of money for a

period of time and are
expressed as a
percentage.

Can either be:

1) Fixed – interest rate does not
change
2) Variable - interest rate changes
based on the market situation
Two ways by which
interest rate can be 1) Borrowing rate - is the
defined: cost of borrowing money
(point of view of a
borrower).
2) Lending rate - is the fee
charged for lending
money (from a lender’s
point of view).
 Classifications of
Interest rates
1) Short‐term (less than one year)
2) Medium‐term (more than one year but
less than five years)
3) Long‐term (more than five years)

Interest rates differ, depending on the type of instruments and on the tenor of
investment.
Nominal Interest Rates
refers to the interest rate before
taking inflation into account

Real Interest Rates

are interest rates that has been
adjusted to remove the effects of
inflation.

r = (i‐π)/(1+π) (where r is real interest rate, i is nominal

interest rate and π is inflation rate).
Yield Yield refers to the earnings generated and realized on
an investment over a particular period of time, which is

Curve also known as interest rates.

- shows the overall

movement of • Treasury bills have maturities of a year or less.
interest rates. • Treasury notes are issued with maturities from two to ten
years.
• Treasury bonds are long-term investments that have
maturities of 10 to 30 years from their issue date.

The primary market is where securities are created, while

the secondary market is where those securities are
traded by investors.
Yields of Government Securities in the Secondary Market
In percent
 Market
(i) The economic impact of the
coronavirus pandemic and the uncertainties
corresponding quarantine
measures imposed by
governments around the world

(ii) The eruption of Taal volcano in

January

(iii) Geopolitical concerns between the

US and Iran at the beginning of the
quarter
5. How are
interest rates Today - the level of interest rates is determined by
determined? the interaction of the supply and demand for funds in
the money market.
In 1983, were fixed by the Bangko Sentral ng Pilipinas
(BSP).
In 1981, the Central Bank of the Philippines
deregulated all bank rates except short‐term lending
rates.
In 1983, the deregulation of bank rates was
completed with the removal of the remaining ceilings
on short‐term lending rates.
 6. What is the BSP’s policy on interest
rates? Does the BSP regulate the interest
rate charged by banks, lending investors
and pawnshops?

Since 1983, the BSP has followed a market‐oriented

interest rate policy. That is, it allows the market to set
its own rates.
Thus, the BSP does not regulate the interest rate charged
by banks, lending investors and pawnshops.
However, for transparency
purposes, the BSP requires that
the interest rates applied on:

Pawn ticket Pawnshops

Promissory note Lending investors
Loan agreements Bank loans.
7. Can the BSP intervene so
that banks will not charge very
high lending rates?
The BSP’s past experience with rate‐setting
made apparent the limitations of an
administratively fixed interest rate. For this
reason, the BSP shifted to a market‐oriented
interest rate policy in 1983.
 The re‐imposition of rate ceilings or limits on the
spread between the T‐bill rate and lending rate will only
introduce distortions in the credit market, including:
a) the pricing of credit outside of the fundamental issue of
risk;
b) the exclusion of certain segments of the economy from
the market;
c) the need to also regulate other banking products and
services;
d) the increased burden on bank supervision.
 After the Asian crisis, however, the
Banker’s Association of the Philippines
(BAP) decided to implement a
gentleman’s agreement to maintain a
cap on the spread of bank lending rate
of up to a maximum of five (5) percent
over the 91‐day T‐bill rate in the
secondary market.
• Can the BSP set interest rate levels? 

Yes, by law,  the BSP can effectively set interest  rates. Under the 

Usury Law  (Act No. 2655, as  amended by P.D. 116), the Monetary 
Board can prescribe the maximum interest rates for loans  made  by 
banks,  pawnshops,  finance  companies and  similar  credit 
institutions, and  to  change  such rates whenever warranted by 
prevailing economic conditions. Moreover, the BSP charter 
(R.A. No.  7653) allows  the Monetary Board  to  take appropriate 
remedial measures whenever  abnormal movements in monetary 
aggregates, in  credit  or in  prices endanger  the  stability  of the 
Philippine  economy.  Nevertheless,  since  1983,  the  BSP  has 
followed  a  market‐oriented  interest rate policy.
• What factors influence the rise and fall in interest rates?
  

Interest rate movements in the Philippines are affected general
ly by the price level or inflation  rate,  fiscal
policy stance, and intermediation cost which could impact 
the demand and supply  for money.
 Inflation  rate
 
The  BSP’s  policy  direction  to  achieve  its mandate  of maintaining  price  stability  has  a 
marked  influence  on  the  interest  rate  level.  When  there  is  too  much  liquidity in the system,
 there is more pressure  for inflation to rise. To curb inflationary 
pressures arising from excess liquidity in the
 system, the BSP will have to increase its key  policy  rates, overnight 
borrowing  rate  or  reverse  repurchase  rate  (RRP)  and  overnight  lending rate  or  repurchase 
rate  (RP). 
 
By  increasing  its  key  policy  rates,  the  BSP is sending a signal to the 
market that the general level of interest rates will be on an  uptrend. In 
mirroring the movement of the BSP’s policy rates, the benchmark 91‐day 
T‐bill rate also sets the direction for other rates, specifically, bank lending 
rates. 
 Fiscal policy stance

The fiscal policy stance may also influence the direction of interest 
rates. A government  that incurs a  fiscal  deficit  needs  to  finance its 
existing  budgetary  requirements by borrowing from the domestic 
market or from abroad. The higher is the  fiscal deficit,
 the stronger the demand to borrow to finance the gap. This exerts upward 
pressure  on
domestic  interest  rates,  particularly  if  the  government  borrows 
from  a  relatively less liquid domestic market.
 Intermediation  cost
Financial  institutions  incur  costs  in  extending  their  services. Interest  rates  will  tend  to  be 
high  when  intermediation  cost  is  high. 
Included  in  the 
intermediation costs are administrative costs and the BSP’s reserve requirements.

Other factors that could influence the interest rates include the maturity period of the financial 
instrument and the perception of risks associated with the 
instrument. Those with longer‐term  maturity and with  higher  probability  of 
incurring loss  carry  higher interest  rates. The lack  of  intermediation  could also 
affect  interest  rate  movement. For  instance,  with  their  larger 
holdings of non‐performing assets  (NPAs), banks are more cautious in  their 
lending activities. This would tend to induce an increase in interest rates. 
WHAT IS AN INTEREST
RATE CORRIDOR (IRC)?

Interest Rate Corridor (IRC) Is a

system for guiding money market
rates towards central bank (CB)
target policy rate.
The interest rate for the standing
liquidity facilities form the upper
and lower bounds of the corridor.
INTEREST RATE CORRIDOR SYSTEM
CONSISTS OF THE FOLLOWING
INSTRUMENTS:

- OVERNIGHT LENDING FACILITY ( OLF)

- OVERNIGHT DEPOSIT FACILITY (ODF)
- OVERNIGHT REVERSE REPURCHASE (RRP)
- TERM DEPOSIT AUCTION FACILITY (TDP)
REPURCHASE (RP) AND SPECIAL DEPOSIT ACCOUNT
(SDA)
Window were replaced by standing OLF and ODF
respectively

RRP FACILITY – Was modified to a purely overnight RRP.

TERM DEPOSIT AUCTION FACILITY (TDF)

Serves as the main tool for absorbing liquidity
The is expected to promote establishment of benchmarks
for short terms interest rate.
BENEFITS OF THE
ADOPTION PHILIPPINES
OF IRC SYSTEM IN THE
PHILIPPINES

The strengthening of monetary

policy transmission by ensuring that
money market interest rates move
within a reasonable range around
the BSP policy rate.
BSP narrowed the
width of the
corridor from 350
basis points to
100 basis points
(+50 basis point)
 WHY ARE INTEREST
RATES NOT THE
SAME IN ALL BANKS?

The cost of doing

business varies from
Bank of bank and this
is reflected in the
different lending rates
charged by the banks.
 What interest rates
are monitored by the
BSP?
 Overnight Lending Facility (OLF) Rate

• The interest rate on the standing

overnight lending (i.e. Repurchase)
facility at which the BSP lends
reserves to commercial banks.
• The interest rate the central bank
sets to target monetary policy.
 Overnight Deposit Facility
(ODF) Rate
• The interest rate on the overnight/term
deposit (i.e. Special Deposit Account)
facilities at which the BSP takes
deposits from commercial banks.
• The interest rate at which a depository
institution (generally banks) lends or
borrows funds with another depository
institution in the overnight market.
 Term Deposit Facility (TDF) Rate

• The interest rate on the term deposit (i.e. 7‐day

and 28‐days term deposits auctioned using
variable‐rate with multiple price tenders)
facilities at which the BSP takes deposits from
commercial banks.

The BSP currently offer three tenors— 7 days, 14

days and 28 days—in its weekly term deposit
auction.
 Overnight Reverse Repurchase
(RRP) Facility Rate

• The interest rate on the RRP facility at

which overnight RRP agreements are
offered to banks. The offering involves a
fixed rate and full-allotment method
where individual bidders are awarded a
portion of the total offer depending on
their bid size.
 Treasury bill (T‐bill) Rate
• The rate on short‐term debt
instruments issued by the NG for the
purpose of generating funds needed to
finance outstanding obligations. T‐bills
come in maturities of 91, 182 and 364
days. Auction is usually held on
Mondays at the Bureau of the Treasury.
 Interbank Call Loan Rate

• The rate on loans among banks for

periods not exceeding 24 hours primarily
for the purpose of covering reserve
deficiencies.
 Philippine Interbank
Offered Rate (PHIBOR)
• The participants consist of 20 local
and foreign banks, which post their bid
and offer rates between 10:30 – 11:30
A.M. on an electronic monitor where
lending rates in pesos are determined.
The rates given by the banks are used
as their dealing rates or the rates at
which they will be able to borrow from
or lend to the market during the day.
 Philippine Interbank
Reference Rate (PHIREF)
• The PHIREF rate is estimated through a
“fixing” arrangement wherein an average
rate is calculated from rates contributed by
a panel of banks.
 PHP BVAL Reference Rates

• (“BAP”) is the benchmark administrator

and owner of the PHP BVAL Reference
Rates to be used as the Philippine Peso
Government Securities benchmark in the
GS market.
 Time Deposit Rate

• A time deposit is an interest-bearing

bank account that has a pre-set date of
maturity.The money must remain in the
account for the fixed term in order to
earn the stated interest rate. Time
deposits generally pay a slightly higher
rate of interest than a regular savings
account.
 Savings Deposit Rate

• The rate charged on all interest‐bearin

deposits of banks, which can be
withdrawn anytime.
 Bank Average Lending
Rate
• The weighted average interest
rate charged by commercial
banks on loans granted during a
given period of time.
 Lending Rate

• Refers to the range (high and

low) of lending rates reported by
commercial banks on a daily
basis. The low end refers to the
prime lending rate.
• Interest rate is the amount
charged on top of the principal
by a lender to a borrower for the
use of assets.
Why is there a gap between
the banks savings deposit
rate and lending rate?

The gap reflects the interest rates

charged on loans, covering not only the
cost of funds but also intermediation
and other overhead cost, as well as the
spread of profit margin.
What implications do interest
rate levels have on the
economy ?

Low interest rate- reflects competitive conditions as well as the actual cost
of funds, should impact positively on a bank’s financial performance.
High interest rate- tend to reduce borrowing for investment activity,
ultimately leading to slower economic growth.
Very low interest rate- it leads to sharp and sustained increases in asset
prices beyond what can be supported by long term economic fundamentals.
 HOW WOULD YOU
DESCRIBE INTEREST
DEVELOPMENT SINCE
THE MID 1990’S
- 1998- treasury bill rates is declined because of the
Asia Crisis in 1997.
- 2002- reached its lowest yield.
- 2002-2004 - begin to inch up
- 2005-2006 - T-bill rate eased. It reflecting
decelerating inflation, improving fiscal
performance and ample liquidity in the financial
system.
- 2006- April 2007-The down trend in T-bill rates
- September 2007- Rate continued to increase
gradually due to worries over the impact of the U.S
subprime mortgage market troubles on local market,
despite continued benign inflation.
- December 2007- average domestic interest rate
eased.
- 2008- T-bill rates trekked a general uptrend as a result
of higher inflation due mainly to rising commodity prices
and due to the higher risk premium demanded.
- 2009- short term interest rates started to ease
following the six rate cuts in the BSP’s key policy rates
since December 2008.
- 2010-2011 –interest rate declined further as a result
of BSP’s previous monetary policy decision.
- 2012 – domestic interest rate in the primary market
started to increase on the back of cautious market
sentiment amid the continued debt crisis in the euro
area.
- 2013- domestic interest rated in the primary market
declined for ample liquidity in the financial system.
- In 2014, the average T-bill rates in the primary market edged higher as inventors
sought higher yields on expectations of on increase in interest rates as the US
Federal Reserve’s monthly bond-buying ended in October 2014.
- In 2015, Treasury bill rates in the primary market rose across tenors even as
domestic inflation remained subdued throughout the year.
- In 2016, T-bill rates declined reflecting strong investor reference for short-dated
tenors amid concern over slowing economic growth in Asia and the continued
expectation of a US Fed rate hike in the coming months.
- In 2017, T-bill increased due to geopolitical concerns overseas and heightened
uncertainty on the direction of US fiscal and monetary policy.
- In 2018, T-bill rates further increased as a result of policy rate hikes by the BSP
and the US Federal Reserve.
- The average interest rates for 91-, 182- and 364-day T-bills in the primary market
in Q1 2020 rose to 3.161 percent, 3.459 percent, and 3.793 percent from 3.118
percent, 3.229 percent and 3.528 percent, respectively, in the previous quarter.
The results of the auctions reflected market players’ risk aversion amid
geopolitical tensions between the US and Irans as well as concerns over the
impact of Taal Volcano's eruption during the early part of the quarter. However, a
declining trend was seen mid-part of the quarter following the 75-basis point
cumulative policy rate cut by the BSP and due to increased demand for short-
term government securities amid uncertainties and lingering concerns over the
COVID-19 outbreak.