Inflation is an international phenomenon and the world cannot totally remove it as the balanced inflation is vital to sustain the economic growth and to keep the economy in a dynamic position. It is the fact that if inflation is totally removed, it will badly affect the economic growth through many facets.
Inflation is a situation when too much money chases too small goods –it means prices are going to increase, but in parallel the purchasing power of the people and productions in the country is not increasing, owing to that unemployment is growing, economic activity becomes a slow and recession period is started that leads to depression in the long run.
If inflation continues, it hurts badly the economy; redundancy prevails; poverty increases; law and order situation deteriorates; the trust of the people on the Government shakes; the purchasing power of people is much reduced that leads them into a gloomy and poverty situation.
It is the main function of the Government and Central Bank to control inflation. Inflation can be controlled through fiscal and monetary policy. The fiscal policy maker is the Government whereas the monetary policy is formed by the Central Bank. One of the main functions of a Central Bank is to sustain stability in prices and for this purpose the central bank initiates multiple steps, such as i) bank rate 2) open market operation 3) rationing of credit 4) direct action 5) Changes in cash reserves 6) Changes in margin requirements 7) Regulation of consumers’ credit and so on. The Central Bank also safeguards the interest of the public in terms of their deposits and for this purpose; it vigorously monitors the banking activities in the country. The Bank Rate is monetary and inflation tool of the Central Bank as when the money supply is much enhanced in the economy, the Central Bank expanded the interest rate and vice versa.
The existing Policy Rate 5.75% (Interest Rate or Bank Rate) is at the lowest level in the history of Pakistan due to the stable economic situation. This prevailing bank rate has been sustained since May, 2016 that envisages the competency of the money managers of the country. Further, the monetary indicators are showing that the country will progress by leaps and bound soon – InshaAllah. The monetary indicators have also proved that the Central Bank of Pakistan is doing its function robustly and efficiently for the betterment of the economy.