Negative real interest rate to be detrimental for country: SAI

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City Reporter

The SITE Association of Industry (SAI) understands the philosophy of adhering to the conventional wisdom of maintaining positive real interest rate which is done to restrict money supply thereby curbing demand led inflationary pressures. In a statement, Saud Mehmood, Chairman, Trade and Taxation committee, said that SAI strongly believes that the above is true only in the case of full employment in the economy, whereas in our economy factors of production are under employed. Therefore, a slight uptick in demand due to relaxed monetary policy will easily be met due to availability of supply with most plants running at less than full capacity. He said that another advantage of keeping a higher policy rate is inward flow of foreign capital in our economy because of over 13.25% return. However, while examining the options available to investors, rates offered by similar economies must be studied. Since the rates offered by India (5.15%), Bangladesh (5%) & Sri Lanka (8%) are less than our policy rate of 13.25% interest-rate, SAI strongly believes that there is no reason for such a large premium especially after contraction of CAD to current levels. Therefore, the case of negative real interest rates for our economy will be beneficial in the short run.