The State Bank of Pakistan (SBP) made a drastic cut of 1% to the interest rate on Saturday to bring it to an eight-year low of 8.5 per cent for the next two months. The SBP Governor said this was due to a fall in inflation, both food and non-food inflation were declining. This is because food is in better supply and the non-food items have been impacted by the decline in oil prices. One would have assumed that this would have impacted oil itself, and the consumer would have had some relief, but any benefit was washed away by the recent oil shortage and government negligence. Additionally, the expected shortfall in FBR revenue and higher security-related expenditures will challenge the government with regards to meeting the deficit target.
With regards to the two-month decrease in interest rate, there are questions to be asked. What’s the point of dropping it for two months only? It takes a much longer time for the effect of the interest rate to benefit the economy. Who does the two-month fall benefit and hurt? The interest rate will have a negative effect on National Savings schemes as profit rates will fall. Senior citizens, pensioners and widows stand to lose. However, the first to benefit will be business and industrial interests. A loose monetary policy can spur economic growth and this is not a bad time to ease up on our long historic contraction. Investment will be encouraged, if the policy lasts long enough for the economy to adjust. Actual economic growth that creates job, increase wages and builds new factories is always beneficial to the masses. However, monetary policy can often aid speculative economic growth which is always focused among the already rich. It creates a bubble, burdens the economy with debt and leads to economic collapse. We have already seen the US and UK during their mortgage-housing crises suffer from this. It is hoped that the SBP in its policy changes only sticks to interest rate manipulation, and not printing more money as this only causes inflation and ends up decreasing the value of the rupee.