KARACHI: The State Bank of Pakistan (SBP) increased the key interest rate by 50 basis points, taking it to 6.50 per cent, effective from Monday, for the next two months.
The move was widely expected by followers and analysts, as inflation readings are expected to edge up in the coming months due to rising oil prices, weaker rupee and a bulging trade deficit. The development is a boost for the banking sector that can now expect improved profitability, and is a negative for highly leveraged firms as well as consumers who will see debt repayment become expensive.
In its last meeting, the SBP had chosen to keep the interest rate unchanged at 6% stating, “The Monetary Policy Committee is of the view that some time may be allowed for the impact of recent policy developments to unfold.”
It now seems that the impact of policy developments – which included letting the rupee lose value on two separate occasions – is now being felt.
The central bank had earlier jacked up the interest rate in January by 25 basis points to 6%, after maintaining the status quo for 20 months. Previously, the rate had stood at a four-decade low of 5.75% since May 2016. It was in double digits at 10% in the first half of fiscal year 2012-13 before inflationary pressures started easing.
The SBP announces a target rate every two months, which serves as the benchmark interest rate for overnight funds in the interbank market. It is one of the tools the central bank uses to ensure price stability in the economy.
Decreasing the target rate poses the risk of high inflation, but also stimulates economic growth by making credit cheaper. In contrast, raising the target rate restricts the level of liquidity, which subdues consumer prices in the economy. The central bank tries to strike a balance by targeting the overnight cost of funds at a level that promotes maximum economic growth without causing high inflation.
