You may be paying more on your credit card bills from October 1 because the central bank is likely to increase its key interest rate by 0.5% in its next monetary policy announcement on Saturday.
The State Bank of Pakistan’s policy rate is the interest rate at which commercial banks borrow money from it. In other words, this rate affects every interest rate in the market.
The hike in the SBP’s rate means commercial banks will also increase their interest rates, including those you pay on your credit card payments and car loans.
Why is the SBP doing this?
One of the SBP’s responsibilities is to keep inflation in check. Inflation rose to 5.84% in August and may touch 7.5% by next June. To stop prices from going up, the SBP will have to increase the policy rate by at least 0.5%, according to a majority of analysts SAMAA Digital spoke to.
They say that inflation is rising because of the recent changes in the economy and the rising price of crude oil in the global market, which determines local petrol and diesel prices.
The government is likely to increase petrol prices in October since international crude oil prices have gone up. The market expects the price of petrol to go up by at least Rs3.5 and diesel by at least Rs3.25.
The Economic Coordination Committee, the key government body of the cabinet that makes major economic policy decisions, is reviewing electricity tariffs next week. They are expected to raise electricity prices by at least Rs2 per unit. Last week, the government raised gas prices.
These developments will result in higher cost of production for businesses, which will translate into higher prices for consumers. For example, the fertiliser sector uses gas as a main input and expensive gas would mean the price of a fertiliser bag will increase by Rs130. This will translate to an increase in the price of agricultural products (like food).
The critically low level of dollar reserves in Pakistan is another reason behind a possible hike in the SBP’s interest rate, analysts say. Pakistan has fewer dollars to pay for imports and repay its foreign loans. A higher interest rate will also make borrowing expensive for businesses that import raw materials, which cause drain of dollars.