POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

STA MESA, MANILA

COLLEGE OF POLITICAL SCIENCE AND PUBLIC ADMINISTRATION

DEPARTMENT OF POLITICAL ECONOMY

Interest Rate: Effects in Money Supply in the Philippines 2000-2014

RESEARCHERS:

Nicki Vine C. Capuchino

Ma. Isabel Guarte

Alyssa Nicole Mocon 

Hannah Grace Sobrepena

PRESENTED TO:

Prof. Norie L. Maniego

INTRODUCTION

• Interest rate is the price of money. This is the same as saying that it is the outcome of the interplay between the demand for and supply of money. Interest rates are prices.

• There are two ways by which interest rates can be defined: first, from the point of view of a borrower, it is the cost of borrowing money (borrowing rate); and second, from a lender’s point of view, it is the fee charged for lending money (lending rate).

• Money supply can be affected by interest rates depending on the economy’s situation.

BACKGROUND OF THE STUDY

• Our economy is experiencing a sudden phenomenon, a phenomenon wherein the interest rate increases or decreases. As time goes by, people will hold, spend, deposit or diversify their money at the end of the day. People will always come up to a realization if it is or it isn’t risky to hold money and ends up with a decision. As we can see, one of the key players in the money supply is the interest rate. Whereas, the interest rate and the supply of money are inversely related.

STATEMENT OF THE PROBLEM

• What are the different types of interest rates?

• What is the trend of reverse repo rate (RR/P) and money supply from the year 2000 to 2014?

• What is the effect of interest rate to money supply?

SCOPE AND LIMITATIONS OF THE STUDY

This study focuses on how the interest rate affects the money supply from the

year 2000 to 2014, in the country Philippines.

SIGNIFICANCE OF THE STUDY

The significance of the study is to know the effects of interest rate in the money supply and to awaken the awareness of the people, so that they will be able to decide well on what to do with their money in various situations. In that way, people will learn in what grounds they should allocate their money into assets and such.

REVIEW OF RELATED LITERATURE AND STUDIES• LOCAL STUDIES

(BSP perspective) Money Banking in the Philippines by Gov. Rafael Carlos B. Buenaventura - Financial instruments in financial markets are priced differently. Each type of financial instrument is characterized by its own way of quoting the price of money. Debt instruments are priced through interest rates while equity instruments are priced using the required rate of return that may be in the form of dividends and capital gains.

• FOREIGN STUDIES

The Keynesian and Neo-Keynesian demand for money John Maynard Keynes in his General Theory of Employment, Interest and Money (1936) - introduced interest rate into the determination of the demand for money called The Liquidity Preference Theory, incorporates three motives for holding money- the transactions, precautionary and speculative motives. However, our study focuses only in interest rate and its effects on money supply

REVIEW OF RELATED LITERATURE AND STUDIES

METHODOLOGY

A descriptive and quantitative methodology was used for this study. As students of Monetary Economics under the program of Bachelor of Science in Political Economy, we have observed that interest rate is one of the most involved key players during our discussions. With that, we became too inquisitive regarding relative things about interest rate like how does it affect the money supply. We have researched in the National Library and some websites. Our data were successfully interpreted by the use of E-views.

PRESENTATION AND ANALYSIS

Classification of interest rate

The interest rates charged on borrowed funds are generally classified according to the tenor or the maturity period: short-term (less than one year); medium-term (more than one year but less than five years); and long-term (more than five years).

Short-term interest rate

Short-term interest rates are those generally associated with treasury bills or comparable instruments that have a three-month maturity. However, in the markets there exists of a whole range of instruments: those with maturities of one month, three months, six months and twelve months are normally classified as short-term.

Long-term interest rates

Long term interest rates are the rates are most usually defined as those associated with bonds with a maturity of ten years. In applying the Maastricht convergence criteria. However, instruments with a five-year or a thirty-year maturity exist, and both fall into the category of yielding long-term rates.

Real interest rates

Real interest rates are interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Real interest rates are what matter to households’ consumption and firms’ investment decisions, which collectively constitute aggregate demand.

Interest Rates that are monitored by the BSP

• RP Rate - the interest rate on transactions in which one party (Party A) sells government security to another party (Party B), and simultaneously agrees to buy back the security from Party B at a predetermined price on a specified future date. RPs may have overnight or term maturities.

• RRP Rate - the interest rate on an RP transaction that has an opposite effect on the parties involved. RRPs are typically contracted between the BSP and the banks. It allows the BSP to siphon off liquidity from the banking system on a temporary basis (as compared to the long-term effect of a change in reserve requirements). RRPs may also have overnight or term maturities.

• Treasury bill (T-bill) Rate - the rate on short-term debt instruments issued by the National Government 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) - represents the simple average of the interest rate offers submitted by participating banks on a daily basis, under the auspices of the BAP. 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.

Interest Rates that are monitored by the BSP

• Philippine Interbank Reference Rate (PHIREF) - the implied interest rate on the peso derived from all done USD/PHP swap and forward transactions. The rate is a firm price, not an indicative quote, transacted among financial institutions.

• Philippine Dealing System Treasury Reference Rates (PDST) - published rates by the Philippine Dealing and Exchange Corporation (PDEx), a dealing market for the trading of fixed income securities in the Philippines, i.e., government and corporate bonds, and treasury bills.

Interest Rates that are monitored by the BSP

• Time Deposit Rate - the weighted average interest rate charged on interest-bearing deposits with fixed-maturity dates and evidenced by certificates issued by banks.

• Savings Deposit Rate - the rate charged on all interest-bearing deposits of banks, which can be withdrawn anytime. It is derived as the ratio of interest expense on peso deposits of sample banks to the total outstanding level of these deposits.

• Bank Average Lending Rate - the weighted average interest rate charged by commercial banks on loans granted during a given period of time. Monthly data are computed as the ratio of actual interest income of sample banks on their peso-denominated loans to the total outstanding level of these loans.

• 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 Rates that are monitored by the BSP

Factors influence the rise and fall in interest rates

• Interest rate movements in the Philippines are affected generally by the price level or inflation rate, fiscal policy stance, and intermediation cost which could impact the demand and supply for money.

PHILIPPINE MONEY SUPPLY M0 YEAR 2000-2014

Philippines Money Supply M0 is the most liquid measure of the money supply including coins and notes in circulation and other assets that are easily convertible into cash. Money Supply M0 and M1, are also known as narrow money. 

PHILIPPINE INTEREST RATE YEAR 2000-2014(The official interest rate of BSP is the reverse repo rate (RR/P) which is the overnight borrowing rate.)

In Philippines, interest rate decisions are taken by The Monetary Board of The Bangko Sentral ng Pilipinas (BSP). The official interest rate is the reverse repo rate (RR/P) which is the overnight borrowing rate.

EVIEWS INTERPRETATION

ANALYSIS: For every 1% increase in INTEREST RATE (denoted as

IR) have 46, 219.04 PHP MILLION decrease in money supply

(denoted as M0) in the Philippines for the observation years of 2000

- 2014.Therefore, M0 and IR has an inverse relationship.

Dependent Variable: MO Method: Least Squares Date: 10/06/14 Time: 19:05 Sample: 2000 2014 Included observations: 15

Variable Coefficient Std. Error t-Statistic Prob. C 661918.0 65264.92 10.14202 0.0000

IR -46219.04 9800.966 -4.715764 0.0004 R-squared 0.631085 Mean dependent var 377824.9

Adjusted R-squared 0.602706 S.D. dependent var 154258.4 S.E. of regression 97230.99 Akaike info criterion 25.93113 Sum squared resid 1.23E+11 Schwarz criterion 26.02554 Log likelihood -192.4835 Hannan-Quinn criter. 25.93013 F-statistic 22.23843 Durbin-Watson stat 0.879331 Prob(F-statistic) 0.000404

YEAR M0 IR

2000 192300 13.8

2001 189884.4 8

2002 214673.7 7

2003 232426.5 6.8

2004 253428.8 6.8

2005 267781.9 7.5

2006 305312.7 7.5

2007 347671.4 5.4

2008 429510.25 5.9

2009 457593.2 4

2010 478488.63 4

2011 518553.51 4.5

2012 557490.33 3.5

2013 640916 3.5

2014 581342.5 4

CONCLUSION

• Therefore the interest is the price of money. It is paid for money because money has a time value. Interest rate could be simple or compounded. Simple interest rate, the percentage by which money grows after the passage of a specific period of time, is compounded by equating money’s present value to future payments.

• Therefore the classification of interest rate is classified according to the tenor or the maturity period: short-term (less than one year); medium-term (more than one year but less than five years); and long-term (more than five years). The interest rate that BSP monitoring is the RRP rate, RP rate, Treasury-Bill rate, Interbank Call Loan Rate,

Philippine Interbank Offered Rate (PHIBOR), Philippine Interbank Reference Rate (PHIREF), Philippine Dealing System Treasury Reference Rates (PDST), Time Deposit Rate, Savings Deposit Rate, Bank Average Lending Rate, and Lending Rate

• The official interest rate of BSP (Bangko Sentral ng Pilipinas) is the reverse repo rate (RRP) which is the overnight borrowing rate. Therefore we can conclude that interest rate and money supply M0, M1, M2, and M3 has an inverse relationship.

CONCLUSION

RECOMMENDATION

We, the students of Bachelor of Science in Political Economy, who made this study possible, recommends this paper to the monetary authorities to adjust the interest rate to maintain the inflation target of the Philippines to prevent hyperinflation.