Hike in policy rate

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IN line with market expectations, State Bank of Pakistan on Tuesday raised the key interest rate by 100 basis points to an eight-year high of 13.25 percent over apprehensions of increase in inflation, especially in the first half of current financial year. The inflation is expected to accelerate due to recent Rupee depreciation against the US Dollar and the hike in utility prices.
Indeed increase in the policy rate is not considered a positive thing as it squeezes the business activity and discourages the private sector to make any investment. Already the country’s interest rate is about two to three times higher when compared with other regional countries including India and Bangladesh. However, this time around while announcing the increase in policy rate, SBP Governor Reza Baqir also gave some positive signals. He gave an impression that the worst in the economy would be over in the first half and that it would gear up to return to the good days from the second half. Firstly, it appears now that the exchange rate and the policy rate will remain stable at the current levels and not go further up. Reza Baqir also stated that the inflationary pressure is expected to recede in second half of the fiscal year while a noticeable decline will be noted in the next fiscal year. Indeed this is good news and definitely the decline in inflation will also lead to reduction in the policy rate. These positive signals will also augur well for the stock market. In fact it is opportune time to invest in the stock market to reap the benefits in the long term. SBP Governor Reza Baqir indeed deserves appreciation for being more open now and engaging with the market players and business leaders as restoring their confidence is the only way forward to achieve revenue targets as well as positive growth trajectory.