SBP to Raise Policy Rates by 125 bps to Control Inflation

Currently, Pakistan is grappling with economic turmoil, a fall in reserves and a weakening currency. The government is making every possible effort to tackle its rising inflation. Recently, the State Bank of Pakistan (SBP) has ordered to raise its key policy rate by 125 basis points in an attempt to tackle 13-year high retail inflation. The objective of the SBP in raising the policy rates is to increase the cost of borrowing which in turn will dampen demand and overall economic activity resulting in decreasing inflation.

However, it was not the first time that SBP has increased its policy rate. Back in November, policy rates were increased by 150 basis points and 100 basis points respectively. In May, the Central Bank also increased the interest rate to 150 bps, taking the total increase to 400 bps to counter rising inflation. With decreasing inflation, the hike in interest rate also brings negative effects on the growth of industrial activities, creating more difficulties for the Small and Medium Enterprises (SMEs). The increase in the interest rate will also discourage investors from investing in Pakistan and will affect many different projects. Furthermore, the high cost of borrowing loans for companies and consumers will negatively affect earnings and stock prices. Due to decreasing industrial activities, many industrialists have shown strong opposition against the hike in interest rate.

During the current economic turmoil, Pakistan should focus on the steps which not only slow down the over-increasing inflation but also promote industrialisation. Currently, in Pakistan industrialisation is picking pace, and introducing such measures that negatively affect its growth will hamper the sector to flourish, resulting in decreasing overall economic growth. The incumbent government should take steps for the quick revival of business and industrial activities to improve the ailing economy which had been badly hit by rising inflation. However, this unbearable increase in the interest rate will make the cost of credit unaffordable for the business community and affect their efforts to promote business activities.