Real interest rate sets new record

The real interest rate is now above 1,000 basis points in the wake of an unexpected fall in inflation to 11.76 per cent in May. The real interest rate is the difference between the nominal interest rate and the rate of inflation. Higher real interest rates can raise borrowing costs and force people to curb spending and borrowing. It can slow economic activity. On the other hand, higher rates can also improve the returns on investments. However, the State Bank’s cautious approach has proved harmful for economic growth despite low inflation. Financial experts said the figures for inflation in May were surprising. “This is a blowout number _ at least two per cent lower than what the market was expecting. A rate cut of 200bps is now a sure bet,” said the CEO of Tresmark. “However, we believe this is a one-off and inflation for June will be around 13.5 per cent as additional revenue-related measures like GST and removal of exemptions, along with Eid-related pressures, will bump up prices,” he said.