The State Bank of Pakistan has announced a new monetary policy in which the interest rate has been increased by 1 percent or 100 basis points. Thus, the interest rate in the country has increased from 8.75 percent to 9.75 percent. According to the central bank, the decision is aimed at controlling inflation and making growth sustainable.
The SBP believes that economic activity has remained strong in the past period, however, inflation and trade deficit have increased, the reason for the widening trade deficit is the rise in global commodity prices and local economic growth. And the trade deficit was more than 5 billion.
Pakistan is the 26th largest economy in the world in terms of purchasing power parity and the 42nd largest economy in terms of GDP. However, when the interest rate is mentioned here, it is very important to understand what the interest rate is and its effects on the common man.
Interest rate refers to the rent of the loan amount which the borrower is obliged to pay to the lender as interest after a certain period of time, it is usually expressed in percent. Whenever interest rates on bank loans increase in a country, its economy changes significantly. No country likes to raise interest rates because it has a negative effect on the economy.
Rising interest rates increase the cost of borrowing so the tendency to borrow is reduced and the biggest disadvantage is that the new investment decreases and there is less competition, which in turn increases the tendency for prices to rise. The tendency to buy a house or a car in installments decreases because now each installment becomes more expensive than before.
An increase in interest rates increases the unemployment rate in the country as there is a higher return on keeping money in the bank which leads to lower sales of goods in the markets. However, the government benefits from the appreciation of the national currency as people in other countries start shifting their savings to higher interest rates.
When savings and bank deposits increase, the number of notes in circulation decreases resulting in reduced inflation, but it is also worth noting that the rich get higher interest on their savings, so they become richer and richer and poor become poorer.
The State Bank of Pakistan had on April 16, 2020, reduced the interest rate by 2 percent to 9 percent due to the negative effects of coronavirus and on May 15, one month later, the interest rate was further reduced to 8 percent. On June 25, 2020, the policy rate was cut to 7 percent, further reducing interest rates by one percentage point to support the depressed economy.
SBP Governor Raza Baqir says that economic growth is expected to be up to 5 percent this financial year, except for the 13 percent interest rate situation. The last time the interest rate was set at 13 percent, it was a time of crisis. Now there is a need for the government to come forward to control inflation and formulate a clear economic policy while restoring the value of the rupee.
