In the developing states, international Economists analyzed that because of the limited availability of real and financial sources, increased attention is to be paid to local savings and mobilization of these savings through the banking system. They have dissimilar views when they examine savings, the factors influencing the trend of savings, and the relation of savings and interest rates. As for the role of interest rates, the views vary even greater than concerning the other factors influencing savings. Low interest rates, it is also said that if applied on both credits and deposits, may decline propensity to save: it is not worth saving money.
Contrasting low interest rates, the majority of economists consider the application of high interest rates necessary which encourage savings and thereby investment. The Economists also identified that the impact of interest rates on savings is a problem in which economists’ opinions differ most. Despite the view of the majority of economists speaking against interventions in the money market, in the majority of the developing states a government interest rate control is manifest. The Most significant statement is that not the nominal interest rate but the real interest rate must be taken into account.
Statistics showed that during March to June 2020 in Pakistan, the policy rate was declined by 625 bps within short span of less than 3-months after the Covid-19 outbreak. This was the largest policy rate cut in emerging market economies. During FY2021, State Bank of Pakistan (SBP) sustained an accommodative monetary policy stance, by keeping the policy rate equal at 7.0 percent throughout FY2021. Besides, SBP offered liquidity and regulatory support to businesses and households during the challenging times. Moreover, the government of Pakistan official recorded that in the subsequent monetary policy decisions during FY2021, the Monetary Policy Committee (MPC) sustained the policy rate of 7.0 percent to nurture the economic recovery. At the end of first quarter FY2022, statistics showed that policy rate has grown by 25 bps to 7.25 percent. In subsequent Monetary Policy decisions proclaimed in November and December, 2021, policy rate was grown by 150 bps and 100 bps to 8.75 percent and 9.75 percent, respectively. Officials also noted that the decision was made because of heightened risks associated with inflation and balances of payments, which stemmed from both local as well as global factors. In our Pakistan, high import prices have contributed to higher-than-predicted inflation outturns. At the same time, there were also emerging signs of demand-side pressures on inflation from local administered prices. In December, 2021 monetary policy decision, MPC showed that the goal of mildly optimistic real interest rates was now close to being attained. Statistics also showed that MPC kept policy rate unchanged at 9.75 percent in two successive decisions held on January and March, 2022. However, policy rate was grown by 250 bps to 12.25 percent from 9.75 percent in an unscheduled meeting on 07th April 2022, to address important uncertainty amidst growing global commodity prices and domestic political condition. In monetary policy decision held on 23rd May, 2022 the MPC planned to increase the policy rate by 150 basis points to 13.75 percent. The decision was based on outcome of provisional growth estimates for FY2022 greater than target. In addition to policy rate increase, the interest rates on EFS and LTFF loans are also being raised. The MPC has informed that in future, these rates will be connected to the policy rate and will adjust automatically, while continuing to remain below the policy rate in order to incentivize exports. In July 2022, SBP has sustained the key interest rate at 15 percent. To cool the overheating economy and contain the current account deficit, the policy rate has been grown through a cumulative 800 basis points since last September, some temporary administrative steps have been taken to curtail imports, and strong fiscal consolidation is planned for FY2023. These actions are predicted to work their way by the system over the coming months. The MPC said it noted three main domestic developments counting headline inflation that grew further to 24.9 percent in July, with core inflation also ticking up. The Experts recorded that the trade balance declined sharply in July and the Rupee has reversed course during August, appreciating by almost 10 percent on enhanced fundamentals and sentiment. The Experts also identified that Pakistan has also fruitfully secured an extra $4 billion from friendly countries over and above its external financing needs in FY2023. As a consequence, foreign exchange reserves will be further augmented by the course of the year, assisting to reduce external vulnerability. The Experts also identified that in contrast to the trend since last summer, more emerging market central banks have started to hold policy rates in their recent meetings. This suggests that worldwide, risks may be shifting slightly from inflation toward growth, although this remains highly uncertain at this stage. On balance, the MPC pointed that some greater slowdown in worldwide growth would not be as harmful for Pakistan as for most other emerging economies, given the relatively small share of exports and foreign private inflows in the economy. As a result, both current account deficit and inflation should decline as worldwide commodity prices ease, while growth would not be as badly affected. The MPC also recorded that private sector credit increased by almost 21 percent (y/y) in FY2022, somewhat faster than nominal GDP (Gross Domestic Product).