04-27-2007, 08:48 PM
Dear Shoaib,
Yes what you have written is correct.
I also conclude that the inflation factor is embedded in KIBOR as well as bank's spread and cannot be separately identified.
I just quote one example. Last days, there was a big debate that Pakistan's inflation has crossed 10 percent and was claimed to be at 11 percent. It has nothing to do with SBP pronouncements. It is as per economists and critics. Exactly in those days, I noticed that some of my clients were obtaining loans at KIBOR+2% which at that time almost amounted to 9 percent or 10 percent in total.
Off course this rate was the nominal interest rate.
I could not understand where has the formula of NOMINAL INTEREST RATE - INFLATION = REAL INTEREST RATE gone at that time.
Becoz if this formula was true
Real interest rate = 9 % - 11% = -2%
It could not be a minus figure.
So, it was irritating.
Regards,
Kamran.
Yes what you have written is correct.
I also conclude that the inflation factor is embedded in KIBOR as well as bank's spread and cannot be separately identified.
I just quote one example. Last days, there was a big debate that Pakistan's inflation has crossed 10 percent and was claimed to be at 11 percent. It has nothing to do with SBP pronouncements. It is as per economists and critics. Exactly in those days, I noticed that some of my clients were obtaining loans at KIBOR+2% which at that time almost amounted to 9 percent or 10 percent in total.
Off course this rate was the nominal interest rate.
I could not understand where has the formula of NOMINAL INTEREST RATE - INFLATION = REAL INTEREST RATE gone at that time.
Becoz if this formula was true
Real interest rate = 9 % - 11% = -2%
It could not be a minus figure.
So, it was irritating.
Regards,
Kamran.
