Interest Rate in Pakistan : The situation of inflation in Pakistan is such that the Central Bank there is not able to dare to reduce the interest rates which have reached record high. The Central Bank of Pakistan has kept the key lending rate at a record high level of 22 percent without making any changes in its key lending rate for the sixth consecutive time in its policy meeting. Meanwhile, the newly elected government in the neighboring country is in discussion with the International Monetary Fund (IMF) to get the next tranche of the relief package.
Rate did not change in the sixth consecutive meeting
The IMF has to decide whether Pakistan has fulfilled the necessary conditions to receive the next tranche of $1.1 billion. State Bank of Pakistan (SBP) has kept its key policy rate at 22 percent for the sixth consecutive policy meeting. The SBP said in a statement that the central bank’s Monetary Policy Committee (MPC) met and reviewed the current economic growth. Regarding maintaining the status quo, the MPC said that although inflation has declined significantly, it is still quite high and hence the central bank remains sensitive to risks. The committee said that the data shows a slight increase in economic activities.
Connection between inflation and interest rates
When supply in the market is less and demand is more, inflation increases. One way to prevent inflation is to reduce liquidity from the market. That means people will not have extra money to spend, so they will buy less products, which will reduce demand and bring inflation under control. Central banks do this by raising the key interest rate. Due to this, other commercial banks increase the interest rates, which makes the loan expensive. People take less loans and spend less money. This reduces liquidity.
falling foreign exchange reserves
Pakistan’s foreign exchange reserves are continuously falling due to loan repayment amid economic crisis. On January 26, 2024, Pakistan’s foreign exchange reserves were recorded at $8.21 billion. If the reserves of commercial banks are also included, then the total liquid foreign exchange reserves of Pakistan are $13.26 billion. Commercial banks have reserves of $5.04 billion.
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