SBP increases interest rate to 14%

The State Bank of Pakistan (SBP) on Monday raised the interest rate by 50 basis points to 14 per cent in an effort to counter inflation.

It is the third time in five months that the central bank has increased the interest rate by 50 basis points, doing so in September and July "to mitigate risks to macroeconomic stability".

Inflation declined to just over 10 percent late last year after peaking at 25 percent in November 2008. But it is again on the rise and was recorded around 14 percent in October.

The central bank is tightening its monetary stance to curb the deepening fiscal deficit and combat rising inflation.

Last week, State Bank Governor Shahid Kardar had said the government had borrowed Rs184 billion from SBP since July 1, 2010 and that government borrowing is the major cause of inflation.

The bank also warned that a narrow tax base and declining tax to GDP ratio are magnifying the fiscal challenges.

According to Express 24/7 Business Editor Khurram Hussain SBP sees the fight against inflation as as the highest priority and as a result the interest rate had to be hiked.

However, industry groups would oppose this move as they argue that the rising cost of funds makes access to working capital and other forms of credit too expensive for them and makes it difficult to conduct business.

The move will also have ramifications for Pakistan’s domestic debt servicing cost, which are scheduled to increase by over Rs 100 billion already and a rise in the discount rate will increase this amount even further.