Optimism over policy rate cut propels PSX past 105,000 milestone

The capital market broke new ground on Wednesday, breaching the historic 105,000-point level as expectations of a sharper interest rate cut gained momentum, fuelled by a consistent drop in inflation.

The Pakistan Stock Exchange's (PSX) benchmark KSE-100 Shares Index climbed 545.26 points or 0.52% to close at 105,104.33 points, after hitting an intraday high of 105,473.56 points.

Topline Securities in its market wrap said persistent buying by institutional investors and high volumes reflected strong market confidence, bolstered by hopes of a reduction in the policy rate at the upcoming MPC meeting.

"Major contributors to the index’s rise were Mari Petroleum Company Limited, Hub Power Company Limited, Air Link Communication Limited, Millat Tractors Limited, and Pakistan State Oil, collectively adding 442 points," the report said.

Trading activity was robust, with a total volume of 1.7 billion shares and a turnover of Rs50 billion. WorldCall Telecom Limited led the volume charts, with 257 million shares traded during the session.

The SBP has already slashed interest rates by 700 basis points (bps) in four consecutive meetings since June, bringing the rate to 15%.

Experts anticipate another substantial reduction, potentially by 200 bps, in the upcoming policy meeting as inflation eases to its lowest level in over six years.

The CPI inflation for November clocked in at 4.9%, well below the SBP’s target range of 5-7%. With inflation expected to remain in single digits, the current policy rate of 15% provides significant room for further rate cuts.

A poll conducted by Topline Securities shows that 71% of respondents expect a minimum cut of 200 bps, with 63% predicting exactly 200 bps, 30% expecting 250 bps, and 7% anticipating a reduction of more than 250 bps.

This reading places inflation at a 78-month low, reinforcing the likelihood of a rate cut. The decline is driven by faster food disinflation and negative electricity price adjustments.

The significant reduction in inflation, which peaked at 38% last year, has revitalised investor confidence.

Post a 200bps rate cut, real interest rates would still stand at 810 bps, which is higher than Pakistan’s historic average of 200-300 bps.

As the SBP’s December 16 meeting approaches, investors remain focused on potential policy rate adjustments.

The trade data released by the Pakistan Bureau of Statistics (PBS) also supported positive investor sentiment.

Pakistan’s trade deficit narrowed by 7.39% during the first five months (July-November) of the current fiscal year, standing at $8.651 billion compared to $9.341 billion during the same period last year.

Exports rose by 12.57%, reaching $13.69 billion, while imports increased by 3.90% to $22.342 billion during this period. November’s trade deficit narrowed even further, dropping by 18.60% year-on-year to $1.589 billion compared to $1.952 billion in November 2023.