PRESENTED BY JAFFAR NAQVI AMNA JAVED KHURRAM SHAHZAD

The general economic picture of a society is one of the more important causes of rate increases. If the economy is not doing well for whatever reason, business loans become that much more risky. Therefore, banks will be more reluctant to lend. This is reflected in the increasing rate of interest.

Many governments worry about inflation. Therefore, if an economy is growing "too fast," the central bank, influenced by the government, might raise rates. EXAMPLE:

Supply and demand make up a large part of determining interest rates. If rates go up, money will go into the bond, or loan market, since that money might do well under the higher rates.

When the national savings are low then the level of interest rises in the country.

The demand for the country's currency can also cause a hike in interest rates. Large trade deficits can be an important cause for this. Dollars are being shipped out of the country to pay for foreign imports over and above the society's exports. Since there are now fewer dollars in circulation, their price will increase. The larger the deficit, the more upward pressure on rates.

In order to raise the level of F.D.I state raises the rate of interest. EXAMPLE

In order to raise the domestic level of investment state bank lowers the rate of intrest.

State bank also use this tool to increase the money supply in the country.

In order to raise the employment level in the country state bank lowers the interest rate.

If the economy overheats and inflation is high, interest rates will have to be really high just to reduce inflation. This was the case in the 1980's, when Paul Volker was the chief of the US Central Bank. If the economy is slow, and deflation is possible, interest rates will have to be really low just to prevent a deflationary economic depression. This is the case in Japan for the past decade, and in the rest of the Western World starting late 2008.

Interest rates rise when things are going well in the economy. If prices of goods and services are high because of high demand, interest rates may increase to help push prices back down and slow down growth.

The benchmark interest rate in Pakistan was last reported at 12 percent. In Pakistan, interest rates decisions are taken by the State Bank of Pakistan. The official interest rate is the discount rate. From 1992 until 2010, Pakistan's average interest rate was 12.78 percent reaching an historical high of 20.00 percent in October of 1996 and a record low of 7.50 percent in November of 2002. This page includes: Pakistan Interest Rate chart, historical data and news