The State Bank of Pakistan has decided to keep the policy rate unchanged at 13.25%, SBP Governor Reza Baqir announced Tuesday.
Speaking at a press conference in Karachi, Baqir said inflation in the country would remain 11-12%, which is expected to reduce after improvement in the supply process. It increased with the hike in prices of food items, he added.
Controlling inflation and ensuring economic stability are two of the SBP’s core functions. To achieve these goals, the central bank uses, among other tools, its policy rate. It is the rate at which commercial banks borrow money from the central bank’s discount window.
The SBP’s policy rate, revised every two months, affects every interest rate in the market. In other words, higher policy rate means commercial banks will charge even more, making borrowing more expensive for individuals, businesses and the government.
Higher interest rates make loans expensive. Businesses, which rely on bank financing, stop doing new projects, the government cuts spending on development projects, and consumers stop availing auto finance, home loan or even credit cards.
In a nut shell, this shrinks economic activity and slows down job creation.