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Taking loans becomes more expensive as SBP increases interest rate

May 20, 2019

Photo: AFP

Loans just got more expensive as the State Bank of Pakistan announced on Monday that it is increasing the benchmark interest rate to 12.25% effective May 21. 

The 1.5% increase is for two months. It has yet to be seen whether the central bank will increase it further after these two months are up. A higher benchmark interest rate means that commercial banks will also increase their interest rates, making it more expensive to borrow or take loans. That’s for individuals (like people wanting loans to buy a car or a house) and businesses (who take loans to expand their companies or buy more machinery).

In Monday’s monetary policy announcement, the central bank said it has increased the policy rate as part of its policy measures to address pressures caused by higher inflation, the recent rupee depreciation, a higher fiscal deficit and potential adjustments in utility (gas and electricity) rates.

The statement noted that there have been three major developments since the last Monetary Policy Committee meeting in March. The first is that the government signed a three-year programme with the IMF, the fiscal deficit has increased because we’ve been borrowing more and the rupee has depreciated by 5.93%  against the dollar.

Related: ‘Imported products to become 40% more expensive in Pakistan’

Though it noted that the current account decreased, the overall deficit still increased because the government has taken more loans this tenure. The current account deficit decreased from $13.6 billion in July to March in the 2017-18 financial year to $9.6 billion July to March 2018-19. The statement said this has been caused by lower imports and higher workers’ remittances. However, higher international oil prices led to the impact of this decrease being reduced.

Financial analyst Muhammad Sohail told SAMAA TV that it was expected that the interest rate would increase by one to 2%. This will have no direct relation to expenses, he said. In fact, this is the government’s way of controlling inflation, he said.

The State Bank is using tightening measures to stop imports, he said. Sohail said that if the interest rate doesn’t go up further in the next announcement, it will be a positive sign.

He said the new finance team, led by Hafeez Sheikh, is trying to heal the economy’s wounds by administering medicine quickly. The last team had a gradual treatment approach, he explained. These measures will hurt in the short-term but will help the economy, he said. Sohail predicted that it will take the economy six to 12 months to recover using these measures.

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SBP, Monetary policy, inflation, interest rate, state bank of pakistan, state bank
 
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