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Interest rate and benefits for economy

Interest rates play a significant role in our economy. As signals direct the flow of a city’s traffic through a complicated grid of intersecting streets and avenues, interest rates channel the flow of funds from savers to borrowers. Usually, the funds flow through financial intermediaries like banks, mutual funds and insurance firms. A balance is struck between the demand for funds by borrowers and the supply of funds from savers by an ever-adjusting level of interest rates. Changes in the quantity of funds available to finance the spending plans of borrowers also changes in borrowers’ demands for funds alter interest rates which, in turn, affect the levels of consumer and business spending, income, the Gross National Product (GNP), the employment of resources and the level of prices. Clearly, interest rates have a tremendous effect on our economy.

Presently the State Bank of Pakistan (SBP) in view of the low inflation rate has kept the interest rate unchanged at 5.75 percent. According to experts the inflation rate in the present fiscal year is predicted to remain well anchored. This has been largely because of the near-absence of any major supply side pressures. However, growing real incomes in a low interest rate environment since FY2014 are indicating signs of pick up in local demand, which is broadly reflected in the core inflation measures.

INTEREST RATE (%)
Countries
Last
Reference
Previous
Highest
Lowest
United States
1.00
Mar/2017
0.75
20
0.25
Euro Area
0.00
Mar/2017
0
4.75
0
China
4.35
Mar/2017
4.35
10.98
4.35
Japan
-0.10
Mar/2017
-0.1
9
-0.1
Germany
0.00
Mar/2017
0
4.75
0
United Kingdom
0.25
Mar/2017
0.25
17
0.25
France
0.00
Mar/2017
0
4.75
0
India
6.25
Apr/2017
6.25
14.5
4.25
Italy
0.00
Mar/2017
0
4.75
0
Brazil
11.25
Apr/2017
12.25
45
7.25
Canada
0.50
Apr/2017
0.5
16
0.25
South Korea
1.25
Apr/2017
1.25
5.25
1.25
Australia
1.50
Apr/2017
1.5
17.5
1.5
Russia
9.75
Mar/2017
10
17
5
Spain
0.00
Mar/2017
0
4.75
0
Mexico
6.50
Mar/2017
6.25
9.25
3
Indonesia
4.75
Apr/2017
4.75
12.75
4.75
Afghanistan
15.00
Mar/2017
15
21
15
India
6.25
Apr/2017
6.25
14.5
4.25
Pakistan
5.75
Mar/2017
5.75
19.5
5.75
China
4.35
Mar/2017
4.35
10.98
4.35

 

The real economic activity continues to gather pace at the back of better agricultural output, rise in key Large-scale Manufacturing (LSM) sectors, and a healthy uptick in the credit to private sector. This expansion is assisted by a range of factors counting low cost of inputs, upbeat economic sentiments, enhanced energy supplies, and CPEC related investments. As a consequence, GDP growth is predicted to further improve in FY2017. Also, prudent monetary policy stance has translated well into low and stable market interest rates, which incentivized private sector to borrow from commercial banks to finance their businesses and investment activities.

Accordingly, private sector credit rose by Rs 349 billion during July-February FY2017 as against to Rs 267 billion in the corresponding period last year. Fixed investment category led to the increase in private sector businesses loans by recording Rs 159 billion uptick during this period, as against to Rs 102 billion previous year.

Similarly, consumer financing continued the uptrend in the first 8-month of the current fiscal year. Improved interbank liquidity situations also spurred the growth in private sector credit. This was led by both net government retirement to commercial banks and a decent rise in bank deposits compared to the withdrawals seen last year.

Furthermore, interbank liquidity was managed well with calibrated open market operations that kept the weighted average overnight repo rate close to the interest rate. The expansion in economic activity has also translated into significant rise in imports, which along with lack of any sustained improvement in exports and a small fall in remittances has pushed the current account deficit to US$ 5.5 billion during July-February FY2017.

While net financial flows remained higher, these were not sufficient to finance the current account deficit. However, accounting for optimistic impact of the present policy measures to augment exports and check non-essential imports, the current account deficit may be contained in the coming months.

Also, continuation of the financial inflows, China-Pakistan Economic Corridor (CPEC) related imports, and any major fluctuation in the global oil price will determine the overall position of the external sector in FY2018.

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