KARACHI: The country has been blessed with the low interest environment, which industrialists celebrate as a major factor that would help ‘reduce the cost of doing business’.
In a low inflationary scenario, the SBP had little choice, but to trim the discount rate, which after a cut of 100bps stands at a 10-year low of 8.5 per cent.
Economists suggest that the low discount rate would spur demand for credit, which could both be a boon or a bane for the economy.
“It is difficult to shake off the uneasy feeling that corporates could resort to buying not merely to reform and restructure their balance sheets, but to put money to speculative use,” said a senior analyst, who pointed out that such a phenomenon had occurred in similar situation in early 2000.
He identified two major speculative investment avenues as stocks and the real estate.
The drop in inflation that inevitably leads to low interest rates could lure corporates and individuals to borrow for investment in speculative assets that tend to give immediate yet unpredictable heavy returns. But that is only until the bubble bursts.
With the drop in discount rate to 8.5pc—the rate at which banks under liquidity constraints borrow from the central bank, several market watchers said that the credit to the borrower from banks may be as cheap as Kibor plus 2pc. The demand and borrowings from banks should be used by the private sector for productive use; expansions and diversifications.
“The money managers and regulators should monitor the trail of cash which should not lead to speculative assets,” says a senior economist.
But Khurram Schehzad, director, investment strategy, at Arif Habib Limited, argued that the low interest rates together with the windfall of steep drop in oil prices was a blessing that will go on to “turn the wheels of economy.”
The increase of disposable income would give fillip to consumption and enable industries to operate at optimum capacity, he said.
It would generate employment and encourage companies to re-rate prices of their products at lower levels where economy through full capacity utilisation would lead to higher output and consumption.
Khurram believes that it was too early to worry about the asset bubbles for that would happen when the economy actually heats up.
For the moment, low interest rate was a win-win situation for all: the government; the industries and the consumers.
The government will have the ‘fiscal space’ to undertake the stalled reforms; the industries could enter into dream projects and the consumers would be provided with the purchasing power which could improve the quality of their life.