The State Bank of Pakistan on Monday raised its key rate by 150 basis points (bps), bringing it to 13.75%. This is an 11-year high, and comes as Pakistan faces multiple economic battles.
However, what it does do is add to your cost of doing business – directly or indirectly.
Suppose you have an outstanding loan of Rs1 million. An increase of 150 basis points adds about Rs 1,250 to the monthly installments on a loan of just Rs 1 million.
It’s just the delta, or the change, or the increase in payout. Now, this figure is by no means 100% accurate, but gives you a rough idea of the kind of interest rate charge that a 150 basis point increase places.
The annual increase in payments for a 1 million rupees loan is 15,000 rupees and increases the total amount outstanding to be paid – not including the principal amount – from 122,500 rupees to 137,500 rupees.
Similarly, the monthly interest payment on a loan worth Rs. 5 million increases by a substantial amount of Rs. 6,250. On an annual basis, it increases by 75,000 rupees.
SBP raises its key rate by 150 basis points to 13.75%
Samiullah Tariq, head of research at Pak-Kuwait Investment Company, said it would significantly increase the amount of payouts for people who took advantage of bank loans.
“However, we can characterize this increase as temporary because once the central bank cuts the policy rate following the stability and improvement in the economy, this amount will decrease and the installment payments could return to the same levels as those that people were paying before this increase,” he added. mentioned.
In its statement, the central bank said the rate hike should help moderate demand at a more sustainable pace while keeping inflation expectations anchored and containing risks to external stability.
The MPC will continue to closely monitor developments affecting the medium-term outlook for inflation, financial stability and growth, he said.
Experts react as SBP raises key interest rate
How a rate hike reduces demand
A rise in rates increases the cost of doing business, in the form of interest payments, with cash diverted to meet bank obligations.
In such a scenario, companies tend to divert resources to meet higher obligations, thereby investing less than before. The same argument applies to consumers who spend less, in their effort to meet interest payments.
This drop in spending/investment reduces aggregate demand and moderates inflation, at least in theory.