Chain reaction: Surprise rate cut takes KIBOR to 26-month low

Published: October 11, 2011
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The State Bank of Pakistan (SBP) on Saturday cut its benchmark discount rate from 13.5% to 12%.

The State Bank of Pakistan (SBP) on Saturday cut its benchmark discount rate from 13.5% to 12%.

KARACHI: The bond and equity markets have reacted strongly to central bank’s surprise decision of slashing the interest rate to bring it on a par with pre-2008 crisis levels.

Karachi inter-bank offered rate (Kibor), the benchmark six-month lending rate, plummeted 95 basis points in a single day to a 26-month low of 11.96%, according to a Topline Securities research note.

Furthermore, yields of the actively traded one-year treasury bills and the benchmark 10-year Pakistan Investment Bonds fell by 75 basis points and 60 basis points to trade around 11.90-93% and 12.00-05%, respectively.

The State Bank of Pakistan (SBP) on Saturday cut its benchmark discount rate from 13.5% to 12%.

The rate cut has also benefitted well the stock market on account of better earnings for leveraged companies and reduction in risk-free rate, adds the note.

The Karachi Stock Exchange’s benchmark 100-share index opened with a gap of approximately 350 points to skip over 12,000 points for the first time in two months on Monday.

Profits of leveraged companies to jump 2-8%

Heavily leveraged companies from the cement, textile and fertiliser sectors – whose loans are floating and linked with Kibor – will have to bear lower interest charges from January 2012 following quarterly loan re-pricing in December, says the note.

These companies will be the major beneficiaries of the cut in discount rate, the fee commercial banks pay to borrow money from the SBP. DG Khan Cement, Engro and Pakistan State Oil will be some of the major gainers as their annualised earnings will increase by 7.8%, 6.5% and 2.1%, respectively, adds the research note.

Overall, the rate cut will augment earnings growth by 0.5% in 2012.

Published in The Express Tribune, October 11th, 2011.

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Reader Comments (2)

  • Meekal Ahmed
    Oct 11, 2011 - 7:28PM

    The effect on stocks of leveraged companies was predictable. The effects on the macro-economy are not and therein is the problem.

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  • Adnan
    Oct 14, 2011 - 11:13PM

    This govt seems hell-bent on committing economic ‘Hara-Kiri’: print more notes at cheaper rates and buy votes in the hope of clinging on to power. Who cares about inflation and the resulting devastating effects for the economy -and the common man whose real income is about to fall further?
    The govt is hoping that by the time people realise the cash hand-outs are worthless, they will have conned the voting public into electing them for another 5 year term. And what then of the future? God help Pakistan!

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