SBP's unexpected interest rate hike takes toll on PSX

By Muhammad JuniadPublished On 06 Jan 2023

• KSE-100 index fell by 707 points and at 9:39am it was at 42,229 points.
• PSX had closed at 42,936.73 points last week. 
• Analyst says interest rates at 16% or higher is significantly negative for growth and corporate profitability.

The State Bank of Pakistan's unexpected increase in the interest rate shook investors' confidence on the opening day of the week, as the stock market took a hit with the benchmark KSE-100 index losing more than 700 points Monday morning. 

The Pakistan Stock Exchange's (PSX) benchmark KSE-100 index had closed at 42,936.73 points last week. 

However, once the market opened, stocks fell by 707 points or 1.65% and at 9:39am it was at 42,229 points. 

Analyst Samiullah Tariq laid blame on SBP's decision to increase the interest rate as a key factor for the drop in the KSE-100 index. 

"[The] market wasn’t expecting a rate hike. That’s why it is reacting," the head of research at Pakistan-Kuwait Investment Company told Geo.tv. 

Capital market expert Saad Ali also blamed the "surprise interest rate hike" for the drop, adding that investors may be expecting more hikes given the inflation outlook. 

"Interest rates at 16% or higher is significantly negative for growth and corporate profitability," Ali told Geo.tv. 

At the time the decision was announced by SBP, the markets had closed, which is why the KSE-100 index today went in the red at the opening. 

SBP hikes interest rate to 16% to curtail inflation

On Friday, the Monetary Policy Committee (MPC) of the State Bank of Pakistan (SBP) Friday raised the key policy rate by 100 basis points to 16% — the highest since 1999.

The central bank, in a statement, issued after the meeting said that the decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected.

"This decision is aimed at ensuring that elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis," the MPC said.

The SBP noted that amid the ongoing economic slowdown, inflation is increasingly being driven by persistent global and domestic supply shocks that are raising costs.