Effects of Interest Rate Change on Private Sector Investment, Evidence From Pakistan

This study examines the effects of lending rates, inflation, and exchange rate fluctuations on private sector credits (PSC) in Pakistan from 1961 to 2017. The analysis shows that lending rates have a minimal impact on PSC, with an insignificant relationship. However, inflation and exchange rates show significant negative effects, indicating that rising prices and currency depreciation reduce private sector borrowing by increasing costs and uncertainty. These findings suggest that while interest rate management remains important, policymakers should prioritize strategies for stabilizing inflation and exchange rates to support private sector investment. Consequently, fostering macroeconomic stability may mitigate the indirect effects of the crowding-out phenomenon, promoting a favorable investment environment conducive to private sector growth.