12-09-2006, 02:00 AM
<blockquote id="quote"><font size="1" face="Verdana, Tahoma, Arial" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Schuaeb</i>
<br />Interest rates have definitely got some correlation, however, things in actual world may somewhat different from what theories say in books.
Interest rates are an important monetary tool to control inflation. Example of Pakistani economy is there. The former State Bankâs Governor Ishrat Hussain dramatically reduced the interest rates. At that time it was claimed that the inflation is under control, PSBR (public sector borrowing requirement) is low (PSBR is used for financing fiscal deficit from internal sources). The result for this step was very much there. Primarily low interest rate policy was made to boost investment. Borrowings, especially in the SME sector, showed some significant rise. However, the primary target was not achieved a great deal. Money, withdrawn from the banks, was invested in speculation business. And the foreign remittances, which witnessed quite some hike at that time, was not deposited in banks or invested in some productive sector. Instead was invested in speculation business i.e. property. Resultantly, a very high rise in urban properties was witnessed. A high amount of money was injected in the society increasing consumption; inflation was to rise.
Afterwards, a U-Turn in State Bankâs policy was there, denying the governmentâs claim of consistency in policies. Interest rates were increased, as they had to be because the economy was confronting high inflation. In her recent speech, the present Governor Dr. Shamshad Akhter affirmed that high interest rates would continue, despite the ongoing objections of the business community.
High interest rates means more savings (as depositors are encouraged), lesser investment (real rate of return on capital is not high), lesser consumption and resultantly reduced inflation.
Shoaib
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
This is surely is inline with my arguments.
<br />Interest rates have definitely got some correlation, however, things in actual world may somewhat different from what theories say in books.
Interest rates are an important monetary tool to control inflation. Example of Pakistani economy is there. The former State Bankâs Governor Ishrat Hussain dramatically reduced the interest rates. At that time it was claimed that the inflation is under control, PSBR (public sector borrowing requirement) is low (PSBR is used for financing fiscal deficit from internal sources). The result for this step was very much there. Primarily low interest rate policy was made to boost investment. Borrowings, especially in the SME sector, showed some significant rise. However, the primary target was not achieved a great deal. Money, withdrawn from the banks, was invested in speculation business. And the foreign remittances, which witnessed quite some hike at that time, was not deposited in banks or invested in some productive sector. Instead was invested in speculation business i.e. property. Resultantly, a very high rise in urban properties was witnessed. A high amount of money was injected in the society increasing consumption; inflation was to rise.
Afterwards, a U-Turn in State Bankâs policy was there, denying the governmentâs claim of consistency in policies. Interest rates were increased, as they had to be because the economy was confronting high inflation. In her recent speech, the present Governor Dr. Shamshad Akhter affirmed that high interest rates would continue, despite the ongoing objections of the business community.
High interest rates means more savings (as depositors are encouraged), lesser investment (real rate of return on capital is not high), lesser consumption and resultantly reduced inflation.
Shoaib
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
This is surely is inline with my arguments.
