Pakistan’s central bank has cut the benchmark interest rate by 100 basis points to 8% to help people, businesses and the economy fight against the coronavirus pandemic.
The higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall.
These changes can affect both inflation and recessions. Inflation refers to the rise in the price of goods and services over time. It is the result of a strong and healthy economy. However, if inflation is left unchecked, it can lead to a significant loss of purchasing power.
The lower the interest rate, the more willing people are to borrow money to make big purchases, such as houses or cars. When consumers pay less in interest, this gives them more money to spend, which can create a ripple effect of increased spending throughout the economy.
Businesses and farmers also benefit from lower interest rates, as it encourages them to make large equipment purchases due to the low cost of borrowing. This creates a situation where output and productivity increase.
The interest rate is a tool available with SBP to create a balance between the rate of inflation
and economic activities in the country.
The coronavirus pandemic has created unique challenges for monetary policy due to its non-economic origin and the temporary disruption of economic activity required to combat it.
In particular, the successive policy rate cuts and sizeable cheap loans provided through the SBP’s enhirced refinancing facilities have helped maintain credit flows, bolster the cash flow of borrowers, and support asset prices.
Thisl easier monetary policy can provide liquidity support to households and businesses to help them through the ensuing temporary phase of economic disruption.