Rising yields point to interest rate hike in Pakistan

Analysts at Pakistan’s leading brokerage houses say commercial banks are increasingly signaling a possible shift in the country’s interest rate cycle, with rising secondary market yields pointing toward a potential policy rate hike in the coming months.

According to reports compiled by JS Global, Insight Securities, Topline Securities, and Ismail Iqbal Securities, bank management teams broadly indicated that monetary easing may have run its course.

Officials from MCB Bank told analysts that policy rates have “likely bottomed out”, with a potential increase expected in either the April or June meeting of the Monetary Policy Committee (MPC). The bank noted that although bond yields saw a one-day decline of 21-85 basis points, they remain elevated by 100-179 basis points over the past two months, suggesting markets are pricing in a rate hike.

Similarly, Bank Al Habib said during its corporate briefing that elevated secondary market yields reflect expectations of a policy rate change. Management added that any increase in interest rates would likely support profitability, given the bank’s significant exposure to floating-rate assets.

“Secondary market yields suggest expectations of a policy rate hike, which could positively impact profitability,” the bank said, highlighting that 85% of its investment portfolio is linked to floating rates, including Pakistan Investment Bonds (PIBs) and Sukuk instruments.

Bank Al Habib reported that deposits rose to PKR 2.5 trillion by December, up 15% from a year earlier, while advances declined 13%, broadly in line with industry trends. The bank aims to grow deposits by 16-17% in 2026, maintaining a current account mix near 38-39%. Its lending portfolio remains concentrated in textiles (33%), followed by financials (23%), food and allied industries (13%), and wholesale and retail trade (11%).

The bank also expanded its branch network to 1,323 outlets, including 392 Islamic branches, and expects cost efficiencies in 2026 due to fewer planned branch openings and reduced marketing expenses.

Meanwhile, MCB Bank reported deposits of PKR 2.2 trillion in December, marking a 17.6% increase year-on-year, supported by a strong focus on low-cost current accounts. Its CASA ratio rose to 97.4%, helping reduce the cost of deposits significantly.

The bank’s investment portfolio surged 67% to PKR 1.95 trillion, largely due to increased allocation to government securities, particularly floating-rate PIBs. However, net interest income declined 2.3% to PKR 145.6 billion, as a sharp drop in the average policy rate during 2025 compressed margins.

MCB management also said that geopolitical risks are not expected to materially impact revenues or margins at this stage, though any inflationary pressures could increase operating costs. These, however, may be offset by higher bond yields in a rising rate environment.

Analysts say the combined signals from bank briefings and bond markets reinforce expectations that Pakistan’s central bank may soon pivot toward tightening, with profitability prospects for banks closely tied to the trajectory of interest rates.