KARACHI:
Recently, the State Bank of Pakistan (SBP) announced a 100 basis points hike in the policy rate to 21% to anchor the elevated inflation rate. During the meeting, the Monetary Policy Committee of the central bank noted that inflation in March 2023 rose to 35.4% and is expected to remain high. Officials are expected to further raise the policy rate by 100-200 basis points (BPS) for the next six weeks as the country is facing an all-time high inflation.
However, the raising interest rate will only affect economic activities within the country. It will cost higher borrowing which leads to a slowdown in spending, investment, and economic growth. It will also reduce consumer spending and result in a decline in the stock market. It will discourage investors from investing in the economy, which will contribute to unemployment.
We always relied on monetary policy to control demand and inflation. However, the inflation we are facing is cost-push inflation which cannot be effectively addressed by monetary policy. Last year, Sri Lanka defaulted on its sovereign debt leaving many people scrambling without fuel, food, and medications. But Sri Lanka did not change the interest rate from 14.5% even though inflation rose to 66% in October 2022. Perhaps, because the country did not want to further aggravate the crisis. Thus, SBP should revisit its policy as raising the interest rate may further elevate inflation.
Abdul Nasir
Bahawalpur
Published in The Express Tribune, April 8th, 2023.
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