Lowering cap on credit card charges to support consumption, analysts say
By Luisa Maria Jacinta C. Jocson, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) can begin lowering the cap on credit card charges amid easing inflation, analysts said, as this would also provide support for private consumption.
“This could lessen debt burden and boost spending, but it’s important to balance that with protecting borrowers and bank profitability. A gradual reduction based on economic data could be a good approach,” Security Bank Corp. Chief Economist Robert Dan J. Roces said in a Viber message.
BSP Deputy Governor Chuchi G. Fonacier said in May that they are finalizing their review of the current interest rate cap on credit card transactions. The central bank reviews the rate ceilings every six months.
In August 2023, the BSP kept the maximum interest rate on unpaid outstanding card balance at 3% per month or 36% a year. The existing ceiling on the monthly add-on rate that credit card issuers can charge on installment loans was also maintained at 1%.
The maximum processing fee on the availment of credit card cash advances was likewise retained at P200 per transaction.
The BSP last increased the cap by 100 basis points (bps) in January 2023 from 2% previously following the rate hikes delivered by the Monetary Board amid elevated inflation.
The higher cap was also meant to mitigate the impact of inflation on banks and credit card issuers.
The central bank raised borrowing costs by a cumulative 450 bps from May 2022 to October 2023, bringing its policy rate to a 17-year high of 6.5%.
“The increased interest rate was a measure to control inflationary expectations. Its main purpose was to decrease aggregate demand that can arise as certain sectors — and the government — might try to cope with increased prices by raising expenditures,” Leonardo A. Lanzona, Jr., an economics professor at the Ateneo de Manila University, said in an e-mail.
“Thus, inflation has indeed been controlled, [so] it will be alright to reduce the interest rates. Otherwise, the lower interest rates can raise expenditures that can aggravate inflation,” he added.
Headline inflation averaged 6% in 2023, above the central bank’s 2-4% goal, but has since eased amid the lagged impact of the BSP’s rate hikes and despite the El Niño weather phenomenon.
In the first six months of 2024, inflation averaged 3.5%, slightly higher than the central bank’s 3.3% full-year forecast but within its 2-4% annual target range.
Mr. Lanzona noted that any decrease in the interest rate cap will “ultimately depend on how much inflation is expected.”
“If some inflation still exists, the decline in interest rates should be low,” he said.
“When BSP acquiesced to (the) industry proposal to raise the cap the last time, there was at least some macroeconomic basis as BSP itself raised its rate in response to inflation,” Enrico P. Villanueva, a senior lecturer at the University of the Philippines Los Baños Economics Department, said via Messenger.
“Lowering the credit card rate cap now will naturally give retail borrowers some reprieve, but BSP lacks moral anchor to lower the cap now if it has not cut its own rates,” he added.
Mr. Villanueva said that the revision to the credit card rate cap can also be based on the extent of the BSP’s rate cuts.
BSP Governor Eli M. Remolona, Jr. has signaled that the central bank can begin easing its policy stance by next month.
NO NEED TO LOWER RATE CAP
On the other hand, EastWest Bank Chief Executive Officer Jerry G. Ngo said the BSP does not need to lower the credit card rate cap.
“We believe that there should be no downward adjustment in the interest rate cap for credit cards as this is contrary to BSP’s objective of financial inclusion,” Mr. Ngo said in an e-mail.
“Lowering the cap would make it harder for some segments of the population, especially those with low income or poor credit history, to access credit cards. This would limit their options for financing their needs and aspirations, and potentially push them to informal and unregulated lenders that charge exorbitant fees and interest rates,” he added.
Mr. Ngo instead recommended that the central bank should increase and diversify the competition in the credit card market.
“This would encourage more players to enter the market and offer better products and services to consumers. It would also promote better price discovery, as consumers would be able to compare and choose the best deals for their needs and preferences,” he said.
“A more competitive market would also incentivize credit card issuers to lower their interest rates and fees voluntarily, as they seek to attract and retain customers,” he added.
He said the BSP must “work on addressing some of the institutional deficiencies that hamper the development of the credit card market and the financial sector in general.”
“These include the lack of a single ID system, a comprehensive credit bureau, and an effective anti-mule law. These measures would help improve the identification, verification, and screening of credit card applicants, reduce the risks of fraud and default, and enhance the transparency and accountability of the financial system,” Mr. Ngo said.