Analysts expect the State Bank to increase its interest rate by 1%
If you are entering the job market this year, finding your first job may take a while because market analysts expect the State Bank of Pakistan to raise its benchmark interest rate in the next monetary policy announcement on Friday (tomorrow).
The majority of market analysts surveyed by SAMAA Digital say the central bank will continue to push for economic stability and raise its benchmark interest rate by 1%. This means economic slowdown will continue and keep businesses as well as the job market, especially the manufacturing sector, under pressure.
The SBP will raise the policy rate because inflation is on the rise and the recent rupee devaluation will drive the prices of commons goods and services further up.
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, the interest rate at which commercial banks borrow money from the central bank.
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 individuals, businesses and the government. Among all, manufacturing is likely to take the biggest hit.
For example, the textile sector is the biggest private sector borrower of banks and employs 15% of our labor force, the third largest by any sector. Since the sector relies on bank financing, higher interest rates are likely to discourage it from taking loans and thus slow down both its growth and ability to create jobs.
Similarly, the government, the largest borrower from banks, will have to cut back on development projects and hold on to its hiring plans. Even using your credit card or financing your next car will become expensive.
The central bank adopted this stance in September when it raised its monetary policy rate by 1% to 8.5%, double of what market analysts predicted at the time.
The economy is facing a double challenge. The government spending is much higher than its revenue, which results in a deficit (loss) of Rs2.2 trillion a year. On the other hand, our monthly imports more than twice our exports. This double loss coupled with rising inflation is likely to “compromise the sustainability of the high real economic growth path”, the central bank had said in September.
The recent monetary and fiscal (government) policies are likely to affect large scale manufacturing (like 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.
According to experts, we have been trapped in this cycle of fast economic growth followed by a contraction every few years. This is because our growth is led by imports, which become unsustainable beyond a certain point because our exports do not increase proportionately.