Moaaz Manzoor

The bold interest rate cut by the State Bank of Pakistan (SBP) is anticipated to catalyze economic growth by shifting investments from fixed-income assets to equities, easing government debt servicing, and positioning the stock market as an attractive destination for both local and foreign investors, reports WealthPK.

Experts view the policy rate cut by 250 basis points to 15 percent as a pivotal move to stimulate economic activity and growth. Moreover, the interest rate cut is a significant development that will significantly benefit the government, which currently manages substantial domestic debt servicing obligations. Speaking with WealthPK, Chaudhry Ahmad Jawad, Vice President of Pakistan Business Forum, said while the rate cut is a step in the right direction, it primarily benefits the government due to its extensive borrowing requirements. According to the vice president, the private sector continues to contend with relatively high borrowing costs, as financing at the Karachi Interbank Offered Rate (KIBOR) hovers around 18% — a challenging rate for businesses looking to finance growth.

Jawad further noted that while a lower policy rate is generally beneficial, it does not necessarily indicate an optimal business environment or a stand-alone indicator of economic improvement. Muhammad Hamza Anwaar, Public Relations Manager at Zahid Latif Khan Securities, emphasized that the recent decline in interest rates will likely prompt a shift in investments from fixed-income assets to the stock market. This shift is creating a new dynamic for the economy. “The economy is on a growth trajectory, and with interest rates coming down, people are moving away from fixed income to the stock exchange,” Anwaar noted. He said that currently Pakistan's stock market presents a compelling investment opportunity, underscored by a price-to-earnings (P/E) ratio ranging from 5.2 to 5.4, significantly lower than that of other regional markets.

He noted that these relatively low stock prices, in conjunction with the decreasing interest rates, position Pakistan's equity market as an appealing destination for investors. The current PSX index stands at 92,520.49 points, indicating potential for growth. Anwar suggested that a stable GDP, reduced interest rates, and controlled inflation can lead the index to move toward 95,000 points.  The interest rate cut aims to create a more appealing equity market and reflects favorable economic indicators and policy reforms, as noted by Anwaar. He said that if these trends persist, the stock market can potentially reach new highs, attracting both domestic and foreign investors seeking undervalued assets in a region characterized by relatively stable macroeconomic fundamentals.

The SBP’s interest rate cut signifies a strategic shift that has the potential to revitalize economic growth by encouraging investment in equity markets and reducing the government's debt servicing burden. However, the private businesses still face challenges in accessing affordable financing. While this move presents promising opportunities, it will necessitate ongoing economic stability and reforms to fully realize its benefits. Experts indicated that although the rate cut serves as a positive indicator, a comprehensive approach —including fiscal discipline, controlled inflation, and supportive business policies — will be essential for achieving long-term economic revival.

Credit: INP-WealthPk