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Pakistan interest rate expected to remain unchanged

State Bank to review interest rates on Monday

SAMAA | - Posted: Sep 19, 2020 | Last Updated: 9 months ago
SAMAA |
Posted: Sep 19, 2020 | Last Updated: 9 months ago

As businesses continue to recover from the losses incurred during the coronavirus lockdown, the experts say that the State Bank is expected to keep the interest rate unchanged when they announce the next monetary policy statement on September 21.

The current interest rate is 7% and the majority of the market believes the rate to remain the same for the next two months.

According to the MPS survey by the CFA Society Pakistan, 91% of research analysts, including fund managers, security analysts, and economic experts, say the central bank will keep the rates the same and 9% believe it will decrease it by 25 to 50 basis points (0.1% equals 10 basis points). 

Revised every two months, the State Bank of Pakistan’s policy rate affects every interest rate in the market. Any change in this rate either positive or negative has a corresponding effect on the commercial bank’s interest rate that they offer to borrowers.

It also affects the borrowing capacity of individuals, businesses, and the government who would borrow and spend at the same rate if the interest rate is kept the same.

The SBP had slashed the monetary policy rate by 6.25% to a single digit, after five straight cuts since March 17 when this rate stood at a nine-year high of 13.25%.

The move aimed to stimulate economic activity (job creation) after global financial institutions warned that the world was heading towards a recession. It was feared that this recession will be worse than the 2009 financial crisis because of the COVID-19 pandemic.

“Inflation rate in August fell on a year-on-year basis and there is a chance of it falling more,” said Raza Jafri, the director research of the Intermarket Securities. “It should allow the SBP to cut the interest rate but as the economy is recovering there is also a chance of prices increasing due to the increase in demand. Because of the uncertainty about the inflation rate, the SBP most probably would keep the interest rate constant,”.

Controlling inflation and ensuring economic stability are two of the State Bank’s core functions. To achieve them, the central bank uses its policy rate among its other tools. It is the rate at which commercial banks borrow money from the central bank. To boost economic growth, the central bank lowers the interest rate, the opposite happens if it has to contain inflation.

Many analysts also believe next year the interest rate will increase by 50 to 100 basis points (0.5% to 1%), cumulatively.

According to Arif Habib Limited, the bank may want to keep interest stable at the current rate to assist increase in aggregate demand. They say the inflation rate will be around 6.5% to 7% in the next quarter.

“KSE-100, the benchmark rate of PSX. has also risen by almost 5,000 points since the last two months and the government would not want to slow down the market by increasing the interest rate,” former PSX research officer Muhammad Munir Memon told SAMAA Digital.

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