Business owners look towards the State Bank of Pakistan (SBP) to cut interest rates yet again as the inflation rate reached a low of 6.9 per cent in September 2024. The interest rate is expected to fall around two per cent to 15.5 per cent – the lowest in around four years.
The SBP, like other national central banks, uses the interest rate as a tool to control the inflation rate. With annual inflation rates touching 29.18 per cent in 2023, the SBP set an interest rate of 22 per cent to maintain skyrocketing price levels.
With inflation rates touching a 44-month low, however, economic experts believe that the state bank will reduce the policy rate.
Recently, inflation rates have been dropping steadily and September’s sharp decline of 28 per cent in the monthly inflation rate is proof of just that. This is certainly good news for businesses that have been affected by high inflation rates.
This is because they had been suffering from having to pay extortionate “menu costs”. Menu cost refers to the expense a business has to pay to order new price tags, put up new billboards, and as the name suggests, print new menus.
Aside from these costs, the previous year saw a slowdown in sales as customers experienced a “sticker shock” factor every time they found out that prices had increased. However, with inflation rates expected to fall to as low as six per cent in October, businesses are expected to recover even faster than last year’s surge in inflation.
This expected drop in interest rates is likely to spell great news for businesses. This is because investors who had their money parked in savings accounts in banks will find it more profitable to invest in actual businesses.
This will create a huge shift in funds from savings accounts to business projects.
For reference, the average return to the sugar industry, considered to be extremely profitable, in 2023 was 18 per cent while interest rates sat at over 20%. A rational businessman would not forgo a risk-free return in favour of a risky investment that has a lower return.
With interest rates projected to drop to 15.5 per cent, however, a shift in funds will likely be seen from banks to businesses.
Moreover, the PSX (Pakistan Stock Exchange) has seen an incredible year, sitting at just under 89,000 points. Increased investor confidence is likely to continue with dropping interest rates as more money will pour into the stock exchange from banks.
Aside from the increase in projected investment levels by external investors, business owners will probably be more inclined to finance projects using debt if interest rates drop. This is because they will know that they now have to pay much lower interest payments if they borrow money.
Likewise, consumers might also take up these cheaper loans to buy items from businesses – increasing the sales of business owners. If SBP slashes interest rates, businesses are set to profit enormously.
