Banks will benefit the most as the central bank Friday added 50 basis points to 9 percent discount rate (DR).
The upward revision, the analysts believe, was contrary to the market expectations, especially those on the stocks market. It has been approximately 32 months since the policy rate hike was witnessed at 14 percent in January 2011. “SBP’s higher inflation outlook shocked market participants who were relying more on government-IMF agreement and expecting no change,” said Mohammad Sohail, senior equity analyst and chief executive of Topline Securities.
Moreover, he said senior government officials and not the SBP officials, statement of no change gave conflicting signals to the markets. “Time will tell when and for how many months inflation remain above 9.5 percent,” said the stocks broker. InvestCap analyst Abdul Azeem commented that an unexpected and rapid increase in inflation, mainly due to the rising trend observed in international oil prices coupled with depreciation in PKR against USD, has been a major factor behind the increase in discount rate. The SBP expects inflation for the FY14 between 11 and 12 percent.
The SBP’s decision to increase the DR would not bode well for the equity markets, especially for highly leveraged companies. “We predict the cement sector to be the worst affected by this move; similarly the textile sector and Engro from the fertilizer sector would have a negative impact on their valuations largely due to increase in cost of borrowing eroding the bottomline,” said Azeem. However, the banks are expected to be the main beneficiary due to improved spreads after increase in DR. “Also, we reiterate a positive stance on the E&P and power sector consequent to the rising oil prices and negligible debt exposure,” the analyst said.
