ECONOMICS - TURNING THREATS INTO OPPORTUNITIES (Inflation and Intrest)

ECONOMICS - TURNING THREATS INTO OPPORTUNITIES
Inflation and Interest Rates
The theories relating to co-relation of inflation with interest rates has inherent limitations because these theories do not consider the concept of accretion of wealth in few hands. Consequently, although the money supply was high enough but was in few capitalist hands, hence, keeping the interest rates high only hampers the generation of economic activities.
It is worthwhile here to note that OECD has given instructions to its member countries to decrease interest rates in order to generate economic activities and surprisingly UKs economist are in a process to crack the impact of recession by reducing the interest rate even at less than a single digit.
It can effectively be argued that high interest rates are not co-related with inflation in excessive money supply economic environment and keeping the interest rates at current level or merely reducing it by 200 or 250 basis point would only defer the economic recovery of Pakistan. In the recent monetary policy statement, the discount rates were reduced by 100 basis points but contrary to that during the recent auction of treasury bills, the 3 to 6 months TB rates were very much indifferent from one-year TB rates.
One fails to understand the contradictions by State Bank of Pakistan! SBP must rely on strict control through prudential regulations and not through interest rates where most of the banks are operating in private sector. The existing TB rates are nothing but will increase the cost of deficit financing.
Article courtesy of Muhammad Ashraf