The state bank will be embarrassed to keep the interest rate at 7% to target economic growth or raise it to control inflation when it announces its monetary policy on Monday. Experts are also divided on which course the central bank will take – induce economic growth or control inflation.
According to a survey conducted by Topline Securities among 68 experts, 65% of respondents say the interest rate will be kept at 7%. The remaining 35% of respondents say the key rate will be increased, with a majority saying it will be raised to 7.25%.
Topline Securities CEO Mohammed Sohail said the central bank may choose to raise the key rate to 7.25%.
“In addition to the high current account deficit in August, inflationary pressures are also increasing. The latest inflation figures show an increase of 14.3% compared to last year. It’s time to tighten (monetary policy), ”he said.
However, other experts believe the policy rate will be maintained as the government strives for growth and threats to the economy persist.
“The factors that caused the interest rate cut last year still exist,” said senior research analyst Raza Jafri. “The threat of the coronavirus is still there and winter is also upon us. ”
Cold and less humid conditions make the coronavirus more threatening, he said.
Jafri added that the country has not yet recovered from the pandemic and he expects the central bank not to raise interest rates in this monetary policy.
According to another senior research analyst, Adnan Sami Sheikh, interest rates should be kept as inflation is expected to fall below 8% over the next three months. He added that if the central bank raises interest rates, the economy will be under pressure and the government will then have to lower interest rates to induce economic growth.
In the Topline Securities survey report, 54% of respondents say the interest rate will be increased by the end of the year. The State Bank will announce the last monetary policy of this year in November.
In the survey, 57% of respondents see the dollar rate in the range of Rs165 and Rs170. But 39% of those polled see the dollar rate range increase to between Rs 170 and Rs 175.
Monetary policy is announced every two months. The next monetary policy will be announced on November 26 of the current fiscal year.
It should be noted that in March 2020, the interest rate was at a peak of 13.25%. But the coronavirus pandemic and the deteriorating economy forced the State Bank to cut the interest rate to 12.5% in March 2020, and then to 3.5% to 9% in April. Later, in June of last year, the interest rate was further reduced to 7%. The State Bank has not raised interest rates over the past five monetary policies.
What role does the key rate play in the Pakistani economy?
Controlling inflation and ensuring economic stability are two of the main functions of the State Bank. To achieve these objectives, the central bank uses, among other tools, its key rate. This is the rate at which commercial banks borrow money from the central bank’s discount window.
The rate, revised every two months, affects all market interest rates. In other words, a higher policy rate means that commercial banks will charge more, which will make borrowing more expensive for individuals, businesses and government.
Higher interest rates make loans expensive. Businesses, which depend on bank financing, shut down new projects, the government is cutting spending on development projects, and consumers are shutting down car finance, home loans, and even cutting back on credit card use. In short, a higher interest rate reduces economic activity and slows job creation.
On the other hand, a lower interest rate encourages individuals and businesses to borrow more, which in turn increases consumption nationwide. As aggregate demand is high, it pushes up the prices of goods, hence inflation increases.
The role of the central bank is to keep the interest rate at a level that controls inflation while not reducing economic activity.