State Bank of Pakistan Increased the Discount Rate by 200 basis Point

by MJK on November 12, 2008

The State Bank of Pakistan increased the discount rate by 200 basis point to control the record inflation of SBP Logo25% in the country. As a lay man what i think is that the current inflation is mainly powered by inflation in food items. The problem with food items is that that they are either being hoarded or smuggled to Afghanistan where the traders are getting a better return. I don’t understand how the increase in interest rate will impact that specific part of the overall inflation? Can someone gives his professional opinion on this?

KARACHI: State Bank of Pakistan Wednesday increased the discount rate by 200 basis points, tightening the monetary policy further in a bid to arrest the rising inflationary trends in the country.
Governor, SBP Dr. Shamshad Akhtar announcing the interim monetary policy here said the country is facing multiple challenges and that ‘we are going through an extraordinary crisis’.
She blamed flaws in food supply system for the rise in food inflation, adding, increase in wheat support price will help overcome this problem.
Dr. Akhtar said the rate of Consumer Price Index (CPI) rose to 35 per cent while the core inflation climbed to 21.7 per cent and the rate of inflation soared to 25 per cent.
The government has assured of not taking more loans from the central bank and the government’s dependence on SBP for obtainment of loan is on the decline.
Governor SBP observed that the bank deposits have registered growth following the steps taken by the central bank in this regard.
‘The tightening of the monetary policy bore fruitful results and during the last four months the economic indicators reflected figures that met our expectations,” she claimed.
She said the 35 per cent increase in the import bill is not tolerable. (source: The News)

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State Bank of Pakistan Increased the Discount Rate by 200 basis Point | Tea Break
11.12.08 at 7:22 pm

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1 JDee 11.12.08 at 12:35 pm

It’s economics basically.
Like:
-> Interest rates increase
-> Results in a cut in borrowing
-> Decreases money supply in the market
-> Value of rupee appreciates
-> Drives down consumer demand
-> Decrease in consumer spending occurs
-> Drives down inflation
For more info, try Googling ‘inflation and interest rates’.

2 M Junaid Khan 11.12.08 at 12:52 pm

Thanks for the reply. But what if the major contributor in the CPI is food items and as we all know the increase in food items is because of hoarding and smuggling? Do you still think that increasing the interest rates will not negatively impact the market? Don’t you think that it will decrease the borrowings from the banks even for investment purposes and hence further slowdown our already dead economy?

3 JDee 11.12.08 at 7:08 pm

Did I say economics worked in Pakistan? :)
On a serious note, you are right. It’ll slowdown the market further. You see, interest rate is a two way thing. There has to be a fine balance here, I’ll explain how.
You keep interest rates low and you entice expenditure which drives your economy upwards (as was done in Shaukat Aziz’s era). This sometimes can produce hyper-inflation when more money comes in circulation than the total value of goods available for sale in the market. This hyper-inflation can be achieved by excessive government borrowings (which is the case here) as well.
On the other hand, if you keep interest rates high, you control inflation but you might end up slowing down the local economy. But your market might end up looking lucrative to more stable foreign economies where interest rates are generally very low.
But again, the hoarding and smuggling has to stop alongside this to control inflation, there is no doubt about that.

4 whatus 11.13.08 at 7:13 pm

what will happen if pakistan becomes bankrupt?

5 jestin 11.15.08 at 1:13 pm

Junaid, u shd also have some competitive news on india as a wake up call to fellow pakistanis. the news u post here can also be read at dawn. right now we r lacking in the eyes of our rival. please have some eye-opening coverage on them for us to excel. moreover it also adds to your sites popularity. i dont need to mention your motivation behind this site stemmed from your previous blog, that got its largest hit when Nano was mentioned. take care

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