Business community unhappy with minimal interest rate cut by State Bank

The State Bank of Pakistan (SBP) cut its policy rate on Monday by 100 basis points, bringing the interest rate to just 12 percent. However, members of the business community expressed their dissatisfaction with the cut as they believe it does not match the decline of inflation in the economy.

Prior to the Monetary Policy meeting, business owners insisted that the SBP slash its policy rate to single digits. Industry representatives believe that the country can’t grow efficiently, with interest rates sitting above 10 percent.

Martin Raiser, South Asia’s Vice president at the World Bank, mentioned Pakistan’s inability to grow if it does not boost investment levels. The meagre cut in interest rates may prove the senior official’s remarks correct, as a small cut might not be able to spur a significant amount of investment within the economy.

President Atif Ikram Shiekh of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) mentioned a premium of 7.9 percent, as the inflation rate istands at just 4.1 percent. The premium is the gap between the interest rate and the inflation rate in the economy.

The SBP’s conservative behaviour represents their commitment to lowering inflation rates, as the current policy rate is curbing excessive borrowing by businesses and industries alike.

FPCCI initially wanted the SBP to slash the interest rate by five percent, which would have helped Prime Minister Shehbaz Sharif’s plan to revive the economy. This would have lowered the premium down to a more reasonable 3.9 percent, allowing more businesses to borrow funds for expansion purposes.

As per reports, the chamber’s request for a large cut in interest rates was made to align the new monetary policy with initiatives from the Special Investment Facilitation Council (SIFC).

The demand for a cut is not meritless, as core inflation is reported to drop to as low as three percent in January. This drop can be associated with the high rates of interest and the stabilisation of oil prices in the global economy.

While rising inflation levels are harmful to the economy, disinflation can detrimentally affect the economy too. President Muhammad Jawed of the Karachi Chamber of Commerce and Industry commented on how the SBP has kept interest rates high despite Shehbaz Sharif assuring that the rates would drop.

While the low cut displays the SBP’s lack of urgency in aligning the monetary policy with Shehbaz Sharif’s aims, the Prime Minister can not be held liable as the SBP is an independent body free from government influences.

Analysts are predicting a further cut in the interest rates in the coming periods, which may grant business demands of single-digit rates soon enough.