KSE-100 plummets 2% as market reacts to 'surprise' rate hike

In an expected development, the Pakistan Stock Exchange (PSX) reacted negatively to the 100bps policy rate hike announced by the State Bank of Pakistan (SBP) last week, and the benchmark KSE-100 index lost 2.02% on Monday.

By the end of the session, the KSE-100 Index closed with a loss of 865.39 points or 2.02% at 42,071.34.

Across-the-board selling pressure was witnessed as investors reacted to a development that took markets by surprise, after the Monetary Policy Committee (MPC) of the SBP on Friday raised the key interest rate by 100bps, taking it to 16%, the highest since 1998-1999.

SBP raises key interest rate by 100bps, takes it to 16%

A rise in the key interest rate increases finance costs for a company, which in turn dents bottom-line figures. The market was largely in the red with construction, autos, cement, banking and oil shares all trading in the negative zone.

Trading began with a massive fall as the index was down over 700 points soon after the opening bell. Downside pressure persisted throughout the day, but the market did see 42,000 as a key resistance point.

Ahead of the monetary policy announcement, majority of market participants polled had expected the central bank to maintain status quo at 15%.

"This decision reflects the MPC’s view that inflationary pressures have proven to be stronger and more persistent than expected. It 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 had said in its statement on Friday.

PSX remains range-bound ahead of monetary policy announcement

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

"In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth.

“As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response," it said.

Market analysts had earlier told Business Recorder that a policy rate hike would not bode well for equities.

“We expect corporate profitability to slightly revise downwards for cyclical sectors over higher levered books, despite some portion of debt under subsidised rates,” said brokerage house JS Global in a report on Monday.

“Moreover, higher interest rates would also further dampen auto sector volumes amid further discouraging auto financing rates.”

“We believe discount to the local bourse multiples is already priced in. We expect clarity on external support to unlock PSX valuations which are currently trading at P/E of ~3x,” it said.

Sectors painting the benchmark KSE-100 in red included cement (198.27 points), oil and gas exploration (114.77 points) and banking (110.06 points).

Volume on the all-share index rose to 244.4 million from 177.3 million on Friday. The value of shares traded rose to Rs7 billion from Rs6.1 billion recorded in the previous session.

K-Electric was the volume leader with 29 million shares, followed by WorldCall Telecom with 22.5 million shares and Dewan Motors with 13.8 million shares

Shares of 350 companies were traded on Monday, of which 47 registered an increase, 294 recorded a fall, and nine remained unchanged.