Interest Rate Effects in Money Supply

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
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 lenders point of
view, it is the fee charged for lending money (lending rate).
Money supply can be affected by interest rates depending on
the economys 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 isnt 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

LOCAL STUDIES 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.
REVIEW OF RELATED LITERATURE AND STUDIES
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
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.

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.
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
YEAR
M0
IR
2000
192300
13.8
2001
189884.4
2002
214673.7
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
2010
478488.63
2011
518553.51
4.5
2012
557490.33
3.5
2013
640916
3.5
2014
581342.5
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 moneys
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,
CONCLUSION
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.
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.

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

STA MESA, MANILA

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

Nicki Vine C. Capuchino

that it is the outcome of the interplay between the demand for

from the point of view of a borrower, it is the cost of borrowing

BACKGROUND OF THE STUDY

phenomenon wherein the interest rate increases or

STATEMENT OF THE PROBLEM

What are the different types of interest rates?

SCOPE AND LIMITATIONS OF THE

SIGNIFICANCE OF THE STUDY

The significance of the study is to know

REVIEW OF RELATED LITERATURE AND

REVIEW OF RELATED LITERATURE AND STUDIES

PRESENTATION AND ANALYSIS

Short-term interest rate

Long-term interest rates

Real interest rates

Interest Rates that are monitored by the BSP

RP Rate - the interest rate on transactions in which one party

RRP Rate - the interest rate on an RP transaction that has an

Interest Rates that are monitored by the BSP

Treasury bill (T-bill) Rate - the rate on short-term debt instruments

issued by the National Government for the purpose of generating

Interest Rates that are monitored by the

Philippine Interbank Reference Rate (PHIREF) - the

implied interest rate on the peso derived from all done

Philippine Dealing System Treasury Reference Rates

Interest Rates that are monitored by the BSP

interest-bearing deposits with fixed-maturity dates and evidenced by

Factors influence the rise and fall in interest

Interest rate movements in the

Philippines are affected generally by the

PHILIPPINE MONEY SUPPLY M0 YEAR 2000-2014

PHILIPPINE INTEREST RATE YEAR 2000-2014

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

money because money has a time value. Interest rate could

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