Pakistan stocks likely to rally next week on rate cut optimism

Pakistan’s stock market is expected to test new highs in the coming week, with investors focused on an upcoming interest rate announcement by the State Bank of Pakistan that could further ease monetary conditions, analysts said.

Market participants are widely expecting a cut in the benchmark interest rate after SBP's monetary policy committee meeting on Monday, which they say would provide a fresh catalyst for equities after a strong weekly rally.

“We anticipate a 100-basis-point policy rate cut, which would serve as a fresh catalyst for economic improvement,” said an analyst at Spectrum Securities. “If the rate is cut, the market is likely to extend its upward trajectory and test new highs. However, if the policy rate remains unchanged, a period of correction cannot be ruled out.”

Last month, Pakistan's central bank cut the key policy rate by 50 basis points to 10.5%, the lowest since March 2022.

An analyst at Arif Habib Ltd. said the benchmark KSE-100 index is likely to remain positive, supported by expectations of another 75-basis-point rate cut in the upcoming monetary policy statement.

“The expected cut aligns with macroeconomic realities,” the analyst said, adding that several stocks are also likely to remain in focus due to corporate earnings announcements. The KSE-100 index is currently trading at a price-to-earnings ratio of about 9.4 times, offering a dividend yield of roughly 5.3%, the analyst noted.

Nawaz Ali, a research analyst at JS Global, said attractive valuations continue to support positive market activity.

“With valuations remaining attractive, further upside at the PSX cannot be ruled out,” he said. “Any policy rate cut could act as a catalyst for market activity. We maintain a buy-on-dips stance, while advising investors to stay cautious amid ongoing geopolitical developments.”

The KSE-100 index posted strong gains over the past week, overcoming early volatility to close on a bullish note. The index rose 4,068 points, or 2.2%, to finish at 189,167.

Analysts said sentiment was boosted by falling treasury bill yields, which dropped to single-digit cut-off levels for three- and six-month maturities for the first time in four years, signaling easing monetary conditions.

Lower yields reduced the appeal of fixed-income investments and encouraged greater allocation toward equities, while also lowering borrowing costs for companies.

Expectations of a policy rate cut at the upcoming meeting of the State Bank’s Monetary Policy Committee have further strengthened sentiment, analysts said, as lower financing costs could support corporate profitability.

Improved global risk appetite also helped, following a recent easing of tensions between the United States and Iran.

Separately, data showed power generation rose 8.8% year-on-year to 8,487 gigawatt-hours in December, the second-highest monthly output on record. Power generation during the first half of fiscal year 2026 increased 1.1% from a year earlier to 67,356 gigawatt-hours, adding to optimism about economic activity.