Hikes in interest rate appear to be redundant: business community

Pakistan’s business community have stated that hikes in interest rates by central banks appear to be redundant because the recent inflationary spirals are mainly induced by supply-side factors.

In a letter sent to State Bank of Pakistan (SBP) Governor Jameel Ahmad on Tuesday, the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) stated that “G8 started hiking interest rates aggressively well before America’s Federal Reserve failed in containing inflation and this crushed their economies.”

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According to the letter, the average core inflation of these eight countries touched a new high of nearly 10% year-on-year in December 2022.

“Inflation in Pakistan appears more entrenched which mainly stems from substantial exchange rate depreciation, unprecedented hike in international commodity prices, multiple rounds of hikes in energy tariffs and other measures prescribed under the International Monetary Fund (IMF) programme,” it added.

“Despite the episodic hike in the policy rates by 725 basis points from 9.75% to 17% between January 2022 and January 2023, the inflation level in Pakistan surged from 13% to 27.6% in the same period.”

This raises the question of policy rate efficacy in curbing inflation, the letter added.

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The letter was co-signed by FPCCI Policy Advisory Board Chairman Mohammad Younus Dagha and FPCCI President Irfan Iqbal Sheikh.

According to the World Bank Enterprise Survey - 2013, Pakistan’s economy is weakly integrated with the financial sector with only 7% of firms raising finance via formal credit lending institutions. This is considerably lower than peer countries including India (21%), China (25%), and Bangladesh (34%), they wrote in the letter.

In addition, Pakistan’s current policy rate of 17% is well above China, India and Bangladesh, the letter added.

The pre-conditions for completion of the 9th review of IMF are expected to fuel inflation further which cannot be tackled through levering policy rates, it said.

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The letter added that efforts needed to be made to control price manipulation and hoardings in liaison with the respective federal and provincial government departments.

“An active and effective Competitive Commission of Pakistan (CCP) and an effective price control magistracy system also need to play their due role,” it said.

The SBP Monetary Policy Committee (MPC) is set to meet on Thursday to announce the revised interest rate. Market experts are expecting an increase of 200 basis points or above. The current interest rate is 17%.

On Tuesday, the SBP preponed monetary policy announcement to Thursday.

Speaking to Business Recorder, Karachi Chamber of Commerce and Industry (KCCI) President Mohammad Tariq Yousuf hoped the SBP doesn’t increase interest rates.

Contrary to normal understanding that increase in a policy rate slows down inflation, the seasoned businessman said that increase in interest rates would further jack up inflation this time.

“Instead of controlling inflation, another hike in policy rate will jack it up further,” he said. “It will increase the cost of doing business and financing costs would also go up.”

Following an uptick in interest rate, imports will become more expensive and businessmen will pass on the jump in costs to consumers.

“I don’t think jacking up policy rate will work under the present situation,” he said.