November 29, 2010 3 Comments
Saqib: Hey Irfan How are You? Bro have you read the latest news about raise in SBP Policy Rate?
Irfan: Yeah you know its my habit to read Business news every morning.
Saqib: Oh that is really nice, every business student should have this habit. OK bro I have just read the headline, “What is the Complete story Behind it?”
Irfan: State Bank of Pakistan (SBP) has decided to raise its policy rate by 50 basis points to 14 percent with effect from Tuesday (Nov 30, 2010).
This Decision was taken in Lahore by the Board of Directors of SBP under the supervision of Governer SBP “Shahid H. Kardar.”
Saqib: OK. I see. Irfan would you like to tell me the reason behind this increment.
Irfan: Actually this happened mainly of two reasons, one is the increased money supply and the other is increased inflation.
Saqib: hmmm. would you please explains these two reasons?
Irfan: yes sure. Government expenditures increased during flood, deficit increased, as a result of which government borrowings increased. The increased government borrowings up-fronted the money supply and the SBP increased the rate which is a step in tightening the monetary policy.
Saqib: And what is the reason of increased inflation?
Irfan: Increases in electricity and domestic petroleum prices and the impact of the catastrophic floods on food prices did play their part in providing impetus to CPI inflation.
Saqib: What can be the impacts of this raise in policy rate?
Irfan: Interest rate is the main factor while analyzing any economy. This increased rate would increase the cost of borrowing/investing, the investments in the economy will decline, whole private sector would go down. Financial sector will be adversely affected. In return the whole economy will be in trouble.
Saqib: oh… That would be a huge negative impact on the economy. I think the Government borrowings should be controlled. For this, Government should focus on tax revenues. Focus on fiscal policy should be more than the monetary policy.
Irfan: Hmmm….. Nice opinion Saqib.
Saqib: Its class time and I have to go now, will continue this discussion later.
Irfan : Fine. But last thing. Have you any idea about the policy rates of different countries?
Saqib: No. Please share some link.
Irfan: See This You will clearly see where we are standing.
Saqib: Ok. I will. Have a nice day, Meet you again soon.
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