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Covid-19 fourth wave: State Bank may keep interest rates unchanged

Experts say economy is too slippery to brace a hike

SAMAA | - Posted: Jul 26, 2021 | Last Updated: 2 months ago
SAMAA |
Posted: Jul 26, 2021 | Last Updated: 2 months ago

The economy is in a fragile position amid the mutating coronavirus – the Delta virus and subsequent rising cases would prevent State Bank from increasing policy or interest rate, experts say. The interest rate stands at 7%.     

According to a statement issued by the State Bank, the fourth monetary policy of this year will be announced on July 27.

BMA Capital Executive Director Saad Hashmi said that given the current state of the coronavirus interest rates are likely to be maintained at 7%. In addition, the possibility of tightening of restrictions on business hours, would affect businesses and increase the risk of a crisis in the economy.

According to another analyst Raza Jafari, the increasing cases of Delta virus and the pandemic, there is no possibility of raising interest rates.

“If the pandemic situation worsens, interest rate will remain at the current 7% level in future monetary policies as well,” he said. “The value of Pakistani currency is also continuously declining. The pressure on the rupee is increasing and if the interest rate also increases, the difficulties for businesses will increase.”  

“So, the central bank may not increase interest rate,” he said.

The State Bank announces monetary policy every two months with its most important point being that where the central bank wants to keep the interest rate.

The next monetary policy will be announced on September 20 followed by the announcement of the final monetary policy on November 26 of the year.

According to analyst Adnan Sami Sheikh, the rising incidence of coronavirus has raised fears of business shutdowns that will have a negative impact on the economy. He says the State Bank would likely be keeping interest rate unchanged.

It should be noted that in March 2020, the interest rate was at a high of 13.25%. But the coronavirus pandemic and the deteriorating economy forced the State Bank to reduce the interest rate to 12.5% in March 2020 and then another 3.5% percentage points to 9% in April. Later, in June last year, the interest rate was further reduced to 7%. The State Bank has not raised interest rates in the last five monetary policies.

What role does the policy rate play in Pakistan’s economy?

Controlling inflation and ensuring economic stability are two of the State Bank’s core functions. To achieve these goals, the central bank uses, among other tools, its policy 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 every interest rate in the market. In other words, a higher policy rate means commercial banks will charge more, making borrowing more expensive for individuals, businesses and the government.

Higher interest rates make loans expensive. Businesses, which rely on bank financing, stop new projects, the government cuts spending on development projects, and consumers stop availing auto finance, home loans and even reduce credit card use. In a nutshell, a higher interest rate shrinks economic activity and slows down job creation.

On the other hand, a lower interest rate encourages people and businesses to borrow more, which in turn increases consumption on the national scale. Since the overall demand is high, it makes the prices of goods rise, thus inflation increases.

The role of the central bank is to maintain the interest rate at a level that keeps inflation in check while also not reducing economic activity.

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