People fear hike in interest rate too
The KSE-100 index plunged nearly 1,000 points on Monday due to higher inflation in the country.
Inflation increased to 9% in September from 8.2% in August, according to the Pakistan Bureau of Statistics (PBS). Experts say high inflation numbers make investors jittery.
To investors, higher inflation means that the State Bank may increase the interest rate. Increasing the interest rate is the most important tool for a country’s central bank to leash inflation. Higher interest rates help curtail spending by people and companies. It reduces demand which tends to bring down prices.
“Higher inflation rate, political noise and correction in the market have been the reasons for today’s dip,” said Faizan Ahmed, the head of research of BMA Capital. “The sentiments are also affected by the fear that a second wave of coronavirus may come.”
Though the central bank increases interest rate to tackle inflation, higher interest rates reduce demand and subsequently sales of companies. It affects profitability which means stocks become less lucrative for investors. In addition, risk-free debt instruments such as bonds, national saving certificates and T-bills become more profitable.
But Ahmed doesn’t expect the State Bank to increase interest rates before March 2021. “But correction in the market was already due,” he said.
Correction in the market is said to have happened when investors drag the index such as KSE-100 down to its actual value by selling stocks at a given point in time.
Karim Punjani, another senior research analyst, also believes that the State Bank won’t have the luxury to increase interest rates to keep inflation in check.
“There’s growth [in the economy] but it has not happened across the board. Some sectors have shown growth but not all,” Punjani said. “The State Bank may not think of increasing interest rates any time soon unless the economy shows sustainable growth.”
Saqib Hussain, a research analyst at Sherman Securities, said the chances of the State Bank increasing the interest rate can’t be ignored at the time of its next monetary policy announcement.
“There’s inflation. The FATF decision later this month whether to change Pakistan’s status has also been creating uncertainty,” Hussain said. “One can’t say there’s no chance of policy rate going up.”