After the rate hike, why PSX firms and businesses need policy pause

Higher interest rates may be necessary to protect the economy from second-round inflation, but their effect on working capital, company earnings and investment requires a careful wait and watch approach.

Pakistan’s latest monetary policy decision has moved the economic debate from easing toward caution. The recent increase in the policy rate by 100 basis points has come at a time when the economy is facing renewed inflation risks, imported energy pressure, freight uncertainty and external account sensitivity. In such an environment, monetary policy cannot afford to ignore inflation expectations.

This decision should therefore be understood in its proper context. Pakistan is an oil importing economy, and any increase in global oil prices, freight charges or exchange rate pressure can quickly move into transport costs, food prices, production costs and consumer inflation. A higher policy rate can help anchor expectations, protect external stability and signal macroeconomic discipline.

However, the real sector impact also needs equal attention. For many companies listed on the Pakistan Stock Exchange, borrowing is not only used for expansion. It is also used to finance inventories, receivables, imported inputs, fuel purchases, letters of credit and day-to-day working capital requirements. When interest rates rise, the cost of running business also rises.

This is why the issue should not be framed as a simple argument against the rate increase. A more balanced view is that the increase may be understandable under the present inflation and external risk environment, but after this increase, there is now a strong case for a pause. Monetary policy works with a lag, and companies need time to absorb its effect through higher finance cost, rollover borrowing and working capital lines.

The PIDE Policy Viewpoint titled “Hold the Policy Rate at 10.5 Percent on 27 April 2026: Why War Driven Supply Risks Now Outweigh the Case for Further Easing” had already captured this delicate policy balance. Its argument was not that monetary policy should become expansionary. Rather, it recognized that Pakistan was facing renewed inflation risks because CPI inflation had moved upward, external buffers were still limited, and the Israel-US and Iran conflict had created pressure through oil prices, freight, insurance costs and inflation expectations. At the same time, it also warned that a further hike would be excessive because the economy was still in a recovery phase, growth was uneven across sectors, and the real policy stance was already positive. In social and economic terms, the concern was that an additional hike could raise borrowing costs for businesses, slow working capital cycles, delay investment, weaken employment prospects and pass more costs to consumers. Since the shock was largely supply driven, coming from fuel, freight and external uncertainty, a higher policy rate could help anchor expectations but could not directly reduce oil prices or shipping costs. This is why the viewpoint recommended a careful hold with a mildly hawkish bias, meaning that Pakistan needed caution, not aggressive tightening, and that policy should wait to see whether the external shock becomes temporary or persistent.

The latest US Federal Reserve decision offers a useful international reference point. Despite elevated inflation and uncertainty from the Middle East, the Fed kept its policy rate unchanged at 3.5 to 3.75 percent, choosing instead to assess incoming data, the evolving outlook and the balance of risks before making another move. For Pakistan, the lesson is relevant: when inflation pressure is driven largely by oil, freight and external uncertainty, a pause after tightening can sometimes be more prudent than another immediate increase, particularly when businesses are already absorbing higher financing costs.

The company level evidence also supports a cautious wait-and-watch approach. The impact of a 100 basis points rate increase is not uniform across listed firms. It depends on whether a company is a heavy borrower or a holder of large cash and short-term investments. Therefore, instead of treating all PSX companies in the same way, the more useful approach is to look at the extreme cases.

On the negative side, the expected pressure is concentrated in firms with large working capital needs and short-term debt exposure. Due to the policy rate increase, PSO may face an estimated negative PAT impact of around Rs1,755 million, followed by SNGP at Rs1,430 million and SSGC at Rs1,054 million. These estimates reflect the likely increase in the cost of financing receivables, inventory, and liquidity gaps in oil marketing and gas utility companies.

The expected impact is also visible in textiles, cement, and autos. Nishat Mills may face an estimated negative impact of Rs694 million, Interloop Rs571 million, Maple Leaf Cement Rs501 million, Bestway Cement Rs424 million, and Sazgar Engineering Rs509 million. These sectors are more sensitive because they depend on financing for raw materials, inventories, energy, receivables, plant operations and consumer demand. Higher interest rates are therefore likely to squeeze margins, delay reinvestment and, in autos, weaken buyer affordability through expensive consumer financing.

On the positive side, some cash rich firms may benefit from higher returns on surplus funds. OGDC may see an estimated positive impact of Rs2,154 million, followed by POL at Rs872 million, Attock Refinery Rs777 million, PPL Rs750 million, and Lucky Cement Rs637 million. This does not mean that higher interest rates benefit the economy overall. It simply shows that liquidity may protect some firms, while leverage and working capital dependence may expose others to greater pressure.

The broader message is clear. A rate hike does not affect all companies equally. It hurts borrowers more than cash holders. It hurts working capital-dependent firms more than the liquid firms. It hurts sectors with delayed receivables, inventory financing, import dependence and leveraged expansion more than sectors with strong cash balances. This is why the policy debate should not stop at inflation alone. It should also consider corporate earnings, investment, employment, and production capacity.

The social implications are equally important. When finance costs rise, companies may reduce inventory, postpone expansion, slow hiring or pass part of the cost to consumers. Small vendors and suppliers connected to large companies can also feel the pressure through delayed payments, tighter credit terms and lower orders. In this way, the effect of the policy rate travels beyond the banking system. It reaches factory floors, supply chains, households, and market confidence.

The policy response should therefore be coordinated. Monetary caution should be supported by energy cost rationalisation, timely refunds for exporters, predictable taxation, better logistics and targeted working capital support for productive and compliant sectors. The objective should not be easy money for everyone. The objective should be to protect inflation credibility while avoiding unnecessary stress on firms that produce, export and generate employment.

In the end, a higher policy rate may be necessary to defend stability, but tightening without observing its real sector impact can create avoidable pressure. Pakistan now needs a careful balance between inflation control and growth revival. After this increase, a wait-and-watch approach may be both prudent and business sensitive.

The policy rate is a signal for markets, but for businesses it becomes a cost. For workers, it can become a hiring decision. For consumers, it can become a price increase. Pakistan’s challenge is to ensure that the fight against inflation does not unintentionally weaken the productive capacity needed for sustainable growth.

Copyright Business Recorder, 2026