The State Bank of Pakistan (SBP) has hiked interest rates by 150 basis points to tackle the risks of inflation and growing imbalances in payments in the country, raising interest rates in the country from 7.25% to 8.75%.
The interest rate hike was announced by the central bank of Pakistan at the monetary policy meeting which was scheduled to be held on November 26 according to the calendar. However, according to the central bank, due to some urgent factors, Scheduled for November 19, the central bank raised interest rates by 150 basis points.
Although industry and economic analysts and experts in Pakistan were expecting an increase in interest rates, the increase was expected to be between 50 and 75 basis points.
The 150 basis points increase by the central bank is a surprise to industry and trade and economists.
According to him, the basis on which the central bank raised interest rates so much is untrue and this increase was made under precautionary measures under the terms of the IMF in order to suspend the International Monetary Fund’s program for Pakistan. Can be restored.
Experts predict a further rise in interest rates in the coming months.
What are the reasons for the rise in interest rates?
Pakistan’s central bank said the rise in interest rates was due to domestic and international factors.
According to the bank, global prices have been under pressure since the end of the Corona virus lockdown and high energy prices are proving to be lasting.
According to the bank, Pakistan is also being affected by the high prices of imported goods and consumers are paying higher prices because of this, as evidenced by the various inflation scales in the country.
According to the bank, the widening of current account deficit in September and October was higher than expected due to rising oil and commodity prices and external pressure weighed on the Pakistani rupee. Therefore, according to the Monetary Policy Committee, raising interest rates is essential to control inflation and maintain growth stability.
Talking about the reasons behind the rise in interest rates by the central bank of Pakistan, Arif Tawfiq, an economic analyst at Arif Habib Limited, said that the central bank had pointed out a few days ago that some of these unseen factors were the cause. The meeting of the Monetary Policy Committee is to be held one week in advance.
He said that the rate of inflation of seven to nine per cent of GDP and the current account deficit, which was expected to be two to three per cent of GDP, was likely to be higher. Therefore, the central bank took this step and it seemed that the rate of inflation would not enter double digits.
Sana Tawfeeq said that the central bank was expected to increase the interest rate but the possibility was 50 to 100 basis points but instead 150 basis points were increased.
He said that the central bank wanted to reduce the demand by raising interest rates so as to get less money from the banks and due to the extra money the demand for items was increasing which was giving rise to inflation and the demand for these items was met through imported products.
Was goingI raising interest rates the right move?
Leading Pakistani economist Dr Ashfaq Hassan Khan has termed the central bank’s interest rate hike as the second stage of economic collapse.
He said that the first phase was when the interest rate was reduced from 6.5% to 13.25% in June 2018, due to which the government had to pay additional interest of Rs. 1687 billion, then the value of Rs. It was reduced to Rs 166 billion due to which Pakistan’s debt without borrowing money was increased to Rs 4660 billion. Now, in the second phase, interest rates are being raised again and the rupee has already fallen sharply.
Dr. Ashfaq rejected the reasons given by the central bank for raising interest rates and said that the method of raising interest rates to control inflation was completely wrong.
He said that there are four reasons for inflation in Pakistan including supply problems, increase in electricity and gas prices by the government, depreciation of rupee and increase in prices in the world market.
The economist said that the increase in interest rates was done to reduce excess demand while empirical evidence shows that one per cent increase in interest rates increases the Consumer Based Inflation (CPI) in Pakistan by 1.3 per cent. The reason is that banks are lending to consumers at higher interest rates.
Dr. Ashfaq Hassan said that there are many other ways to overcome the imbalance in payments, such as raising taxes on imports or increasing cash margins on them.
He said that the increase in interest rates was not due to economic reasons but the biggest reason was IMF conditions which included raising interest rates as a precautionary measure by Pakistan.
He expressed concern that the central bank may raise interest rates further in December.