1. Why was the interest rate taken up? What does the government want?

The authority to change the interest rate, also called the policy rate, lies with the Monetary Policy Committee (MPC) of the State Bank of Pakistan. Since the SBP or Central bank enjoys a considerable level of autonomy or independence, the government has nothing to do with the MPC decision, at least to the extent that the laws suggest. However, the government’s input is almost always taken into account by the Central bank.

The purpose of a rate increase is to control inflation and the statement from the Monetary Policy Committee takes care to mention this motivation. When the interest rate goes up, people are encouraged to save more because they can earn more profit on their savings.

Conversely, when the interest rate is lowered, people take money out of their bank accounts and invest it in business to earn a profit higher than what a bank can give them. However, this leads to an increase in demand that in turn raises inflation.

Right now, the government and State bank want us to spend less, so that demand and inflation both come down. This is why the interest rate has been taken up.

2. How will the interest rate hike affect my bank loan or car loan payments?

If you have taken a loan for personal reasons or to finance a car, chances are that you are paying 19% interest on it.

Loans given out by banks are managed by a rate called KIBOR plus two to three percent bank profit. The KIBOR rate is pretty close to the official interest rate, the additional amount charged by banks is called ‘spread’.

Before the latest hike in interest rates, this rate was at 19%. Now it will be increased by one percent. So if you are paying an installment of Rs 60,000 to repay your personal or car loan, your installment will increase by at least Rs. 600.

3. Will essential items become more expensive?

The state bank has said that the interest rate has been hiked to counter inflation, and this is true to some extent. However, increasing the interest rate can sometimes have the opposite effect as well. The reason is an increase in the cost of production.

Manufacturers run their factories by taking out loans from banks or investors, so when the interest rate increases, their cost of production increases as well. When manufacturers pass on this increase to consumers, commodities become expensive.

Additionally, some manufacturers decrease their output when cost of production goes up. As per basic economic principles, lower supply will lead to an increase in prices.

4. I am a fresh graduate. How will this decision impact me?

Unfortunately, interest rate hikes also affect people who are not directly a part of the economy.

Increased interest rates cause a reduction in supply, because production contracts across the economy. And when companies are looking to produce fewer goods, they also need to hire and employ fewer people. Therefore, the interest rate hike will decrease employment opportunities, which will especially impact new entrants into the workforce.

However, as the world becomes a global village and communication becomes faster, many young people can earn money online.

5. Will people taking out loans for ‘Mera Pakistan Mera Ghar’ scheme be affected?

This is a difficult question. So we contacted Business Recorder to find and answer. Until the writing of this article ‘Mera Pakistan Mera Ghar’ does not operate on the basis of KIBOR. Conditions for the scheme make it clear that for the first five years the interest rate will be fixed at five percent. For the next five years this will be raised to seven percent, and after 10 years it will be pegged to KIBOR.

So people availing the scheme do not have anything to worry about for the next nine years, changes in interest rate will not affect them. However, when the 10-year period is completed, and the interest rate is still at the same rate, they will get a sudden increase in their payments.

The scheme was introduced in PTI’s government, however loans were discontinued when the current fiscal year began.