Lower Interest Rates: A Double-Edged Sword for Consumers
- FPCCI Raises Concerns
KARACHI: In a significant move aimed at bolstering economic activity, the State Bank of Pakistan (SBP) announced a 200 basis point cut in the policy interest rate, bringing it down from 19.5% to 17.5%. This decision, effective from September 13, 2024, was made during the Monetary Policy Committee (MPC) meeting held on 12 September (Thursday).
The SBP’s monetary policy statement highlighted a notable decline in both headline and core inflation over the past two months. “At its meeting today, the Monetary Policy Committee (MPC) decided to cut the policy rate by 200 bps to 17.5 percent, effective from September 13, 2024. Both headline and core inflation fell sharply over the past two months. The pace of this disinflation has somewhat exceeded the Committee’s earlier expectations, mainly due to the delay in the implementation of planned increases in administered energy prices and favourable movement in global oil and food prices,” the statement read.
The Committee, however, emphasized the need for caution, acknowledging the inherent uncertainty surrounding these developments. They stressed the importance of maintaining a tight monetary policy stance, which has been instrumental in driving the sustained decline in inflation over the past year.
This rate cut is expected to have far-reaching implications for Pakistan’s economy, potentially stimulating borrowing and investment while providing some relief to consumers and businesses grappling with high interest rates.
Economists and market analysts are closely watching how this significant policy shift will impact various sectors of the economy and whether it will help in accelerating economic growth without compromising the gains made in controlling inflation.
The business community has expressed disappointment over the SBP’s decision to cut the interest rate by only 200 basis points. Atif Ikram Sheikh, President of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), stated that the rate cut is “too little, too late” in the context of current inflation rates, both domestically and internationally. He emphasized that the monetary policy continues to be based on a heavy premium vis-à-vis core inflation, and a more substantial reduction is needed to support economic growth and competitiveness.
this move by the SBP signals a careful balancing act between fostering growth and maintaining price stability.
Advantages of Interest Rate Cut for Common Man:
- Lower Loan Installments: Individuals and businesses with loans will benefit from lower monthly installments, providing them with more disposable income.
- Increased Borrowing: The lower interest rate will encourage borrowing, which can stimulate economic activity and create jobs.
- Reduced Cost of Living: Businesses may be able to pass on the savings from lower interest rates to consumers in the form of lower prices for goods and services.
Disadvantages of Interest Rate Cut for Common Man:
- Inflationary Pressure: If the reduction in interest rates leads to an increase in money supply, it could put upward pressure on prices and erode the purchasing power of consumers.
- Risk of Asset Bubbles: Lower interest rates can encourage excessive borrowing and speculation, leading to asset bubbles that may eventually burst.
- Impact on Savings: The lower interest rates may discourage savings, as people may find it less rewarding to keep their money in bank accounts.
Overall, the decision by the SBP to cut the interest rate is a positive development for the economy. It is expected to boost economic growth and provide relief to borrowers. However, it is important to monitor the potential risks associated with this move and ensure that the economy remains on a sustainable path.