Syed Asif Salahuddin

The hike in the US interest rate is not a good omen for Pakistan, as its economy is already in recession in the wake of the recent economic slowdown due to tight monetary policy and devastating floods. In the given scenario, Pakistan will be left with no option but to raise its interest rate, reports WealthPK.

Reducing interest rates has proven to be a reliable strategy for addressing the economic crisis around the world. The rising inflation, causing numerous market busts, has set alarm bells ringing in the world capitals. As long as inflation stays red hot, the market participants' hopes will remain shattered.

On September 13, 2022, the US stock market crashed just after the inflation data for August came in higher than expected. The Federal Reserve's continued aggressive interest rate hikes designed to combat inflation forced investors to cut down their investments.

The interest rates are rising faster than any other time in the recent US history. In just six months, the effective federal funds rate has risen more than 2 percentage points. Having hiked rates by 300 basis points in 2022, the US Fed is all set to hike the rates yet again in November.

The Federal Open Market Committee (FOMC) will meet on November 1-2 to decide on the quantum of the next rate hike. Before that, the September 2022 CPI data is scheduled to be released on October 13.

Talking to WealthPK, General Manager of Arif Habib Limited Omer Iqbal said in the current era of globalization and economic integration, all the economies were inter-connected. Any shift in the situation of an economic power would affect other nations. Pakistan, he said, will not be exempt from the effects of the US aggressive interest rate policy.

“Pakistan's economy is already in recession, and its financial health has been negatively impacted by the recent floods and extreme weather. The news of the Federal Reserve Bank's rate hike is not encouraging for Pakistan and in the coming days, it will also have to raise its interest rate,” Omer said.

According to Omer, Pakistan is already engaged in an IMF loan program, and the rate increase will only worsen its debt burden and stifle future possibilities of economic growth. Investors now view banks as a safe haven and prefer to keep their funds there rather than invest in businesses, he added.

Dr. Atiq-ur-Rehman, research economist and professor at the Kashmir Institute of Economics, told WealthPk that Pakistan’s internal debt has reached over PKR19 trillion, which is about 45% of the gross national product (GDP). The policy rate alone is responsible for 90% of the increase in the domestic debt, and any increase in the policy rate will raise the country's debt burden.

Atiq said that increasing the policy rate is not the best way to fight inflation. Within the past year, the US has increased the interest rate three times, while the UK has raised the interest rates five times since November 2021. However, there is no success so far. In total, almost 90 countries have increased their interest rates since June 2021. But so far, not a single country has had significant success in controlling inflation.

“Expectations are often more effective than reality in the financial market. Most of the countries actually use psychological tactics rather than raising the interest rates. We have been consistently saying for the last two years that the current wave of inflation will not be controlled by higher interest rates. The solution for governments is to increase investment in supply side factors. Investment in hydro, biodiesel, solar and other renewable energy sources should be with the same intensity with which the world dealt with the Covid-19 crisis,” Atiq said.

Credit : Independent News Pakistan-WealthPk