The State Bank has kept the policy rate unchanged at 5.75 percent for the next two months despite the fact that inflation has been increased during the last several months. The bank kept the interest rate unchanged in a bid to project economic stability in the country. Less interest paid by the consumers gives them extra money to spend. As a result, increased spending by the people create ripple effects which stimulate business activities though the private sector may keep itself away from the cheap credit. The lower interests by the central bank often proves beneficial for the businesses and farmers as they are able to purchase equipment due to low cost of borrowings. The State Bank had slashed the policy rates in May on the ground that the government will be able to keep inflation within the limits. According to the bank, inflation has been rising after bottoming out in October last year due to various reasons, including small increase in the domestic demand. The consumer price index increased to 4.2 percent from 1 percent during the period without affecting the growth momentum.
The modern economy is consumer economy. If you spend more and save little, it will boost trade and industrial activities as the industry will have to work overtime to fulfill the demand. But increase in interest rate by commercial banks slows industrial activities as the depositors prefer to earn profit without doing anything. According to the State Bank, uptick in the private sector credit for fixed investment will further support future growth and will help maintain inflation at a manageable level. The macroeconomic stability and retirement of the government’s borrowings from scheduled banks have brought easy liquidity conditions in the money market. The government has gone extra mile to maintain financial stability by increasing the volume of borrowings from international financial institutions. Despite claims of fiscal stability, the economic conditions are not very promising as loans are piling up, exports are falling and the industry could not be brought out from the recession mode. The government is keeping inflation and foreign exchange reserves at certain points by artificial stabilization of rupee and obtaining local and foreign loans. Pakistan has to compete the regional countries in the international market and prudent policies are required for stability of the economy.
The bank rightly pointed out the building up of external buffers during the last three years which have improved resilience of the economy to face external uncertainties.