Interest rate to increase 150 bps as ADB forecasts higher inflationAbdul Gh Lone 14 December 2021 0 COMMENTS
The State Bank of Pakistan (SBP) is likely to increase the interest rate by 100 to 150 basis points (bps) in an important monetary policy announced scheduled for Tuesday evening.
The interest rate hike comes as the Asian Development Bank (ADB) has forecasted higher inflation for Pakistan and other countries in the region in 2022.
The SBP had increased the interest rate on November 19 by 150 bps to 8.75%. The government has, however, auctioned Treasury Bills (T-Bills) at a comparatively higher rate of about 11%, leading investors to speculate that the December 14 monetary policy announcement could include a major interest rate hike.
Market sources on Tuesday said that the SBP can increase the interest rate by 100 to 150 bps.
Karachi Chambers of Commerce and Industry, in a statement, has urged the government not to increase the interest rate as belt-tightening would harm business activities in the country.
Opposition Leader in the National Assembly Shehbaz Sharif, too, on Tuesday criticized the decision to increase policy rate.
How interest rate will affect you
The interest rate hike will affect both businesses and end consumers. It could increase cost of business as commercial loans will become expensive. Businesses will borrow less and they won’t be able to expand business due to insufficient funds. With curtailed business activities, job opportunities will also go down.
Meanwhile, consumers who have leased their vehicles will be paying more on their bank instalments. This in turn could affect sales of vehicles in the country.
The policy rate hike will hit the stock market as well. It could send the market into another nosedive and lead to capital flight to other sectors because after the hike companies’ profits will go down.
It will impact shareholder dividends. Companies won’t be able to offer more dividends to shareholders and as a result, investors will be discouraged and withdraw money from the stock market.
However, the government plans to go ahead with the interest rate hike as it attempts to control inflation.
Meanwhile, the ADB has issued a supplementary outlook for several regions including South Asia.
For South Asia, it has revised the inflation forecast for 2022 “up from 5.1% to 5.3% on the expectation that global prices for food and other commodities remain elevated and as domestic factors come into play in specific economies.”
The ADB says prices in Pakistan may go up under pressure from high energy tariffs and global commodity prices.
“Much of the forecast upgrade reflects a higher projection for Pakistan, where adjustments to energy tariffs and higher global commodity prices are expected to exert upward pressure on domestic prices,” the ADB said.
The ADB has also projected a lower growth rate for South Asia revising its estimates down from 8.8% to 8.6%.