Real interest rate goes up

KARACHI (NeoWeb Desk) The 12-year low inflation has pushed the real interest rate up which could bring long-term economic stability with the equity market a major beneficiary in the short-term, said bankers and analysts.The CPI fell to 1.8 per cent for July that was mainly on account of fall in oil prices and stability in the food prices that dipped by 0.3pc.“Real interest rate has now increased to 5.2pc in July 2015 as against 3.8pc during the previous month and first half average of 2015 (4.8 per cent) due to lower inflation,” said Umair Naseer, researcher at Topline Securities.The State Bank kept the interest rate unchanged in its monetary policy announced in July anticipating easing of inflationary pressure during this fiscal year. Since November 2014, the SBP has slashed its policy rate by 300 basis points due to continued and unexpected fall in the CPI.Bankers said 5.2pc real interest rate is a sign of stability and could boost the trade and industry since both money and goods would be cheaper.The low interest rate has never been attractive for the depositors and investors in the government schemes despite the fact the high inflation makes return on deposits or investments in savings schemes negative.The returns on different National Savings Schemes (NSS) were reduced as result of low interest rate scenario.The collection through NSS in November 2014 was Rs90bn which fell to Rs22bn in December. It rose to Rs34bn in January 2015, but again dipped to Rs16bn in Feb then jumped to Rs22bn in March before falling to Rs8bn in April and rebounding to Rs31bn in May 2015.The 12-month average inflation was 7.6pc in November which fell to 4.5pc in June showing the rising strength of the real interest rate.“In short-term the real interest rate would not have significant impact on the banking in terms of lending and deposits but the long-term impact would surely strengthen the economy,” said a senior banker.He said the low interest rate would help the investors in the equity market particularly people not satisfied with the low return on deposits (not considering positive impact of low inflation) could leave banks for higher returns.Return on deposits fell to 5.35pc for all banks in June 2015 from 8.05pc in June 2014 signifying the change during year.Analysts said the higher real interest rate should be attractive for people as well as trade and industry, but the common investors and depositors would like to get higher return on their investments and deposits ignoring the inflation factor.

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