Diokno tells Filipinos: Invest or spend your money
The Bangko Sentral ng Pilipinas on Monday urged Filipinos to come out and invest what funds they have or alternatively spend them in consumer items instead now that saving a good part of one’s earnings has lost relevance.
BSP Governor Benjamin Diokno acknowledged that real interest rate is approaching negative territory but brushed aside this development quickly by saying this was not an imperative at the moment.
In a negative real interest environment, the return of interest-bearing instruments such as bonds, commercial papers or even one’s savings account is lower than inflation such that it makes more sense for ordinary Filipinos to spend his money or invest it in a productive endeavor instead of saving it in a bank somewhere.
Banks still enjoy the advantages of a positive real interest environment at the moment but for most Filipinos this is no longer the case as inflation year-to-date average 2.5 percent while the banks pay depositors an interest averaging only 0.974 percent, based on BSP data as of end-December 2019.
The banks have not updated the regulator on their savings deposit rates since then, based on BSP data.
In practical terms, it makes more sense for someone with excess funds either to invest it or engage in consumption activities because inflation only eats up the returns presented by a savings deposit account in a bank.
“This is an extraordinary situation but hopefully we will not hit the negative real interest rate. But even if that should happen, that is a come on for consumers to spend their money on worthwhile projects because why would one deposit money in the bank when one is not getting real interest?” Diokno said.
He told financial reporters what the Philippines is experiencing right now is “an extraordinary situation” that hopefully should not deteriorate into a negative real interest rate environment.
“But even (if that) should happen, that is a come-on for consumers to spend their money on worthwhile projects because why would we deposit money in the bank when we’re not getting real interest?” he reiterated.
Diokno also said price stability is the least of their worries at this time as the monetary authorities believe the economic condition, as dire as it is from the health point of view, “favor the investor and consumer.”
At the moment the Bangko Sentral’s policy rate, which is also the rate commercial banks uses as peg for their own lending operations, was only recently cut 50 basis points to only 2.25 percent as a preemptive move should credit becomes increasingly harder to come by as lenders fret over the macroeconomic ramifications of the COVID-19 pandemic.
This is an extraordinary situation but hopefully we will not hit the negative real interest rate