7% Interest Rate; The Pitfalls

Pakistan has witnessed a historic fall in interest rate to 7 percent in 42 years. Such a low level of interest rate has very significant bearings on overall economic growth. This change in rate has both positive as well as negative points as well. Let’s analyze,

Positive Effects;

A. Interest rate and Investment Relationship

a.       Lower level of interest rate boosts Investment.

b.       Increase in investments increases the available stock of capital implying into higher levels of output.  

c.       Higher level of output means higher returns to employed factors of production.

d.      Higher factor’s income means higher consumption and saving of individuals.

e.      Higher consumptions and savings make the quality of life better.  

B. Interest rate and Saving Relationship

a.       Savings are leakages from the circular flow of national income.

b.      Lower level of interest rate decreases level of saving.

c.       Lower interest rate means lower returns on savings maintained on banks.  

d.      Lower returns discourage individuals to save (take bonds, maintain saving deports etc.) but entice to invest or consume money.

e.      Impetus to consumptions and investments translate into greater demands for consumption goods and capital/investment goods respectively.

f.        Aforesaid higher demand means impetus to industry to produce more i.e. boosting economic activity, increasing returns in factor’s income, smoothed consumption, better quality of life.

C.       Ease in Acquiring Loans from Financing Institutes

a.       Lower interest rate means higher demand for loans as cost of loan (amount of money other than principle amount) decreases.

b.      Greater access/availability to loans means greater access to liquidity required for investments or consumption smoothing.

c.       Higher investments mean higher productions, upgraded production functions, higher factor incomes and better quality of life.