The State Bank of Pakistan’s Monetary Policy Committee (MPC)   on March 2, 2023 has  increased the benchmark interest rate (MPR rate) by 300 basis points to 20%, the highest level since October 1996.The main purpose of this upsurge is to rheostat the inflation  The central bank Committee agreed to raise the policy rate by 3% to 20% according to a statement in which it is also announced that next meeting will be held on April 4^th 2023.

The objective of such devastating increase in MPR to control the consumer price index (CPI) which has risen to 31.5% according to Pakistan Bureau of statistics (PBS). The MPC statement state  that depreciation of Pak Rupee against the US Dollar, low foreign reserves and recent budget adjustments by the Federal Government have significantly exacerbated inflation and CPI.

But a large number of independent economists and financial experts believe that the figures quoted by the PBS are misleading instead actual CPI is much higher around 49%.  It is being anticipated that inflation will increase further in the coming months and might touch to 55%-60%.

This upsurge of MPR will brutely effect the financial and non-financial markets, businesses and general public in different ways like:

Decrease in investment:

Businesses may be less inclined to invest in new ventures and expansions when interest rates are too high.

Highest cost of borrowing:

Borrowing  will becomes more expensive when interest rates are high. As a result, it could be harder for customers and companies to have loans, which would further restrict economic development.

Currency depreciation:

The trust of foreign investors in Pakistani economy, Pakistani bonds, and financial instruments may be Shaked so badly when interest rates are high. It may lead to deteriorate the forging investment in Pakatan which is already at lowest level.

Less consumption:

Borrowing money to pay for big-ticket things like homes, vehicles, and other purchases may become more costly for consumers when interest rates are high. Reduced consumption as a result may have a detrimental effect on companies that depend on consumer spending.

Higher borrowing costs for the government:

Higher borrowing costs for the government might result in bigger budget deficits and fewer investment on social welfare programmes.

Summarily, this upsurge in policy rate will adversely impact the economy of the country and further deteriorate the financial and economical situation.