Eco 101

AS predicted earlier, interest rates are on their way up.

With too much pressure on consumer prices to rise (it hit 9.6% in May), the Bangko Sentral ng Pilipinas (central bank) had to hike its key overnight rates by 25 basis points in its Monetary Board meeting yesterday.

According to the BSP Gov. Say Tetangco:

“The Monetary Board believes that there are already indications that supply-driven pressures are beginning to feed into demand.

“Core inflation as of May 2008 has reached its highest level since April 2006.

“Recent business- and consumer- confidence surveys also indicate an upward shift in inflation expectations, coinciding with increased term spreads on government securities and higher secondary-market rates.”

Wading through all that gobbledygook, what the Gov is particularly referring to is the rice supply-demand situation. Because rice seems to be in short supply, it has not been keeping up with the increased demand of the population. Rice, makes up about 50% of the so-called food basket that is measured for inflation rate. And since the food basket constitutes the bulk of the inflation rate, any price movement there will make inflation rise or fall as well.

Also, the massive budget deficit of the government means it doesn't have enough money to fund its operations. Thus, it has to borrow more from the banks via Treasury Bills, notes, bonds which are government securities. In one T-bill auction last month, the one-year T-bill was up at 6.915% from 5.993%, which means banks see a grim inflation outlook.


What this all means is that, yes, believe your wife when she tells you that the prices in the grocery and supermarket are rising. Give her a bigger budget. But tell her to cut down on the non-essentials like the kids' junk food, the sodas, and dining out. (To my restaurateur friends, I apologize for this bit of advice, but the economy is really in for the long haul, and unless you provide value-for-money dishes, you will go through this rough patch as well.)

Postpone purchases made on your credit card or personal loan. Because if interest rates are up, bank lending rates will rise as well.

But all is not lost! You can use this period of instability to your advantage.

Because interest rates are rising, it will be worthwhile to invest again in government securities. Set aside those monies meant for the junk food, colas, beer, and tobacco into an investment fund. Talk to your banker and see what high-yielding government securities and deposit accounts he can offer you. It's time to get back to those time deposits, 5-year tax-free deposit accounts, and commercial debt papers (just check on the company's credentials first).

As a matter of personal choice, I stay away from the mutual funds and UITFs, because I don't want to check on these investments everyday. And mind you, if you have such funds, you have to monitor them closely.

SAVE! I'm sure this will not sit well with businesses because what they need right now is for people to spend to keep the economy going. Well, I'm not against spending, and I'm actually one of those people who can't help but eat out and try a new restaurant. But I think this is a good time to learn the value of saving or prudent spending. It's okay to spend, but as they say, do it wisely.