The stock market suffered on Monday with the benchmark KSE-100 index shedding more than 850 points, and the sudden increase in interest rates by the State Bank of Pakistan rattled investors’ confidence.
The benchmark KSE-100 index of the Pakistan Stock Exchange (PSX) began at 42,936.73 points but ended the day down 865.39 points, or 2.02%, to settle at 42,071.34 points.
As cash-strapped Pakistan waits for funding from bilateral and multilateral partners, investors were concerned about the difficulties facing the struggling economy.
The index continued to plummet, reaching a day low of 41,963.94 points, below the psychological threshold of 42,000 points.
The market sank continuously until midday, when it reached its lowest point for the day, after trading activity started off negatively in the morning. Later, modest buying enabled the stock market to partially recover its losses.
The move by SBP to raise interest rates was cited as a major contributor to the decline in the KSE-100 index by analyst Samiullah Tariq.
“A rate increase was not anticipated by the market. That is why it reacted, “the Pakistan-Kuwait Investment Company’s head of research remarked.
Saad Ali, a capital market specialist, also attributed the decline to the “surprise interest rate hike,” noting that given the inflation outlook, investors may be anticipating further increases.
According to Ali, interest rates of 16% or more have a considerable detrimental impact on firm profitability and growth.
Markets were closed at the time the SBP issued its judgement, which is why the KSE-100 index today opened down.
SBP hikes interest rate
The State Bank of Pakistan’s Monetary Policy Committee (MPC) increased the key policy rate by 100 basis points on Friday, bringing it to 16%, the highest level since 1999.
The decision, according to the central bank, reflects the MPC’s belief that inflationary pressures have proven to be higher and more persistent than anticipated, according to a statement released following the meeting.
The MPC stated that its action “is intended to prevent excessive inflation from becoming entrenched and to control threats to financial stability, thereby clearing the path for greater growth on a more sustainable footing.”
The SBP stated that, notwithstanding the continuous slowing in the economy, supply shocks both domestically and globally are increasingly responsible for inflation.