04-25-2007, 11:42 PM
Yes off course, this is nominal rate.
If a bank is offering 10 percent rate, it represents a portion of inflation included there in.
Inflation do affect SBP base rates as well as lending bank's spread. More the inflation would be in the ecnonomy, more would be the nominal interest rate.
However, there appears practical problem specifically in the countries like Pakistan. For example inflation is normally reported at 10 percent plus in our economy. If inflation is 10 percent then how the interest rate could revolve round about at 14 percent to 15 percent? I know SBP normally shows its aims to curtail inflation below 5 percent and makes similar announcements but practically it does not happen.
I dont know what exactly the current inflation rate is at Pakistan. However, it appears that there remains some timing gap.
As per formula, NOMINAL INTEREST RATE - INFLATION RATE = REAL INTEREST RATE
Nominal interest rate normally includes
- SBP's return;
- Effect of inflation on SBP base rate;
- Lending bank's spread;
- Effect of inflation on lending bank's spread.
This composition shows that in practical the nominal rate might not work back to real rate exactly.
I need comments of other members on this scenario.
Best regards,
Kamran.
If a bank is offering 10 percent rate, it represents a portion of inflation included there in.
Inflation do affect SBP base rates as well as lending bank's spread. More the inflation would be in the ecnonomy, more would be the nominal interest rate.
However, there appears practical problem specifically in the countries like Pakistan. For example inflation is normally reported at 10 percent plus in our economy. If inflation is 10 percent then how the interest rate could revolve round about at 14 percent to 15 percent? I know SBP normally shows its aims to curtail inflation below 5 percent and makes similar announcements but practically it does not happen.
I dont know what exactly the current inflation rate is at Pakistan. However, it appears that there remains some timing gap.
As per formula, NOMINAL INTEREST RATE - INFLATION RATE = REAL INTEREST RATE
Nominal interest rate normally includes
- SBP's return;
- Effect of inflation on SBP base rate;
- Lending bank's spread;
- Effect of inflation on lending bank's spread.
This composition shows that in practical the nominal rate might not work back to real rate exactly.
I need comments of other members on this scenario.
Best regards,
Kamran.
