The State Bank has made loans more expensive
In a sign that businesses will create fewer jobs or even cut some in the near future, the State Bank of Pakistan has increased its monetary policy rate by 1%—double the expectations of most analysts SAMAA Digital spoke to ahead of Saturday’s monetary policy announcement.
Most market analysts had expected that the central bank would raise the policy rate by 0.5% to control inflation, which has been on the rise since March and could reach 7.5% by June. However, the rate hike was well above analysts’ forecasts, which means that the central bank is focusing on economic stability.
The economy is facing a double challenge. The government is spending more than it makes, which means every year there is a Rs2.2 trillion loss or deficit. Adding to this problem is the fact that our monthly imports exceed our exports by $2.7 billion.
This double loss, coupled with rising inflation, is likely to “compromise the sustainability of the high real economic growth path”, the central bank said on Saturday.
Controlling inflation and ensuring economic stability are two of the SBP’s main jobs. To achieve these goals, it uses, among other tools, its policy rate, which is the interest rate at which commercial banks borrow money from it.
The SBP’s policy rate affects every interest rate in the market. A hike in the SBP’s rate means commercial banks will also increase their interest rates, making borrowing more expensive for private businesses and the government, which rely on bank loans to finance new projects.
Expensive loans means businesses may put a stop to new investment (other than necessary ones) and the government will borrow less and do fewer projects, which will translate to a slowdown in job creation.
The rate hike comes shortly after the new government cut its development budget as part of its austerity drive.
The recent monetary and fiscal (government) policies are likely to affect large scale manufacturing (factories) and economic activity (business expansion) may slow down in the financial year ending June 2019. This is because the general macroeconomic policy is focusing towards stabilisation, the SBP said.
The SBP started raising its policy rate after January when it was hovering at 5.75% — the lowest level in 42 years. Following Saturday’s announcement, the rate climbed to 8.5% effective October 1.
The rate hike came after prices of goods and services started increasing across the economy, which created inflationary pressures. The recent increase in domestic gas prices, a higher than expected surge in international oil prices (which makes local petrol more expensive), higher duties on imported items and rupee devaluation against the US dollar are some of the reasons why the SBP decided to increase the interest by 1%.