Inflation, interest rates and oil: what really moves PSX sectors

Ask a room of PSX investors what moves their market and most will name company results, politics or the IMF. Those matter — but underneath all of them sit three slow, powerful drivers: inflation, the interest rate the State Bank sets to fight it, and the price of oil (and coal) that Pakistan must import. Get the direction of these three right and you understand most of what the market did over the last sixteen years — and why some sectors cheered while others were crushed. This guide explains each driver in plain English, shows sixteen years of the actual numbers, and then goes sector by sector: who gains, who loses, why, and over what time horizon.

Where things stand today — November 2026

Start with the live picture, because right now all three drivers are moving at once:

The three drivers, in plain English

1 · Inflation is the speed at which prices rise. Pakistan's measure is the Consumer Price Index (CPI), published monthly by the Pakistan Bureau of Statistics from a basket of food, fuel, housing, transport and other household spending. Food and energy dominate the basket, which is why a petrol-price increase or a wheat shortage shows up in the headline number within weeks. Inflation quietly decides what your money is worth: at 10% inflation, cash under the mattress loses a tenth of its buying power in a year — and a stock that returns 8% has actually gone backwards in real terms.

2 · The policy rate is the interest rate set by the State Bank of Pakistan's Monetary Policy Committee, which meets roughly every six to eight weeks. It anchors every other rate in the economy: KIBOR (what banks charge companies), deposit rates, and the government's own T-bill and PIB yields. The SBP's main job is price stability, so its reflex is mechanical — inflation rising, rate up; inflation falling, room to cut. Two consequences matter for shareholders. First, competition: when T-bills pay 20%, money leaves the stock market for a risk-free 20%; when they pay 10%, dividends yielding 7% look attractive again. Second, cost: every company that borrows pays KIBOR plus a spread, so a rate hike flows straight into finance costs — and a rate cut flows straight out of them.

3 · Oil and coal prices are Pakistan's import bill. Pakistan produces only a fraction of the oil it burns, so nearly every barrel is bought in dollars at world prices. Expensive oil widens the trade deficit, drains foreign-exchange reserves, pushes the rupee down — and a weaker rupee makes every imported thing dearer, which feeds inflation, which forces the SBP to raise rates. Traders call this chain the energy–rupee–inflation–rates loop, and it runs in both directions: cheap oil (2015–16, 2020) set off the happiest years in PSX history. Coal matters the same way for a narrower group: cement kilns and several power plants burn imported coal, so the coal price is a direct cost line for them.

Sixteen years on charts

The first chart is the dance at the heart of this guide: inflation (red) surges, the policy rate (gold) follows it up — usually late, and higher — then inflation breaks, and the rate follows it down. Almost every bull and bear market below is visible in these two lines.

Coal's 2022 spike — from $61 a tonne in 2020 to an average of $345 in 2022 after the invasion of Ukraine — is the single most violent cost shock in the whole dataset, and it landed almost entirely on one sector: cement. Remember it when we reach the sector tables.

The sixteen years in one table

*2026 is the year to date (inflation: January–October average ≈10.1%, October itself 9.6%; policy rate after the 27 October decision; KSE-100 at the 10 November close against its end-2025 level). Inflation: annual average CPI, World Bank/PBS. Policy rate: year-end SBP policy (target) rate — before May 2015, the SBP discount rate it replaced. Oil and coal: annual average prices, World Bank Commodity Markets; 2025 Brent from the U.S. EIA. KSE-100: year-end closes and annual returns as compiled from PSX data.

Sixteen years in six chapters

2010–12 · Tight money, dear oil. Inflation ran at 13%, then 12%, then 10%; the policy rate started at 14%. Oil climbed above $110. The market went up 28% in 2010 on post-crisis recovery, slipped in 2011, and jumped 49% in 2012 as rates were cut to 9.5% and an election approached. Lesson one: the market rose fastest not when times were good, but when rates were falling.

2013–16 · The great easing. Inflation collapsed from 7.7% to 2.5% as oil crashed from $99 to $44 and a stable government completed an IMF programme. The SBP cut the rate to 5.75% — then the lowest in the country's history. The KSE-100 returned +49% (2013), +27% (2014) and +46% (2016), reaching 47,807; MSCI announced Pakistan's upgrade to Emerging Market status. Cement, banks and anything levered to domestic demand led. This is the template of a Pakistani bull market: falling oil, falling inflation, falling rates, rising multiples.

2017–19 · The bill arrives. The index peaked at 53,124 in May 2017 — then politics, a widening current-account deficit and a sliding rupee took over. Inflation climbed back to 10.6% by 2019 and the SBP hiked from 5.75% to 13.25%. The index fell 15% in 2017 and 8% in 2018. Dollar-earning exporters and the oil producers, whose product is priced in dollars, held up far better than leveraged domestic cyclicals. Lesson two: in a devaluation, own things priced in dollars or with pricing power; fear debt.

2020–21 · The whipsaw. COVID crashed the index to 27,200 intraday in March 2020; the SBP cut 625 basis points in four months, to 7%, and oil averaged $42. The market recovered so fast it ended 2020 up 7.4%. Cheap money plus lockdown savings produced a boom in cement, steel, technology and small-caps — and quietly, commodity prices began the climb that would end the party.

2022–23 · The storm. Russia's invasion of Ukraine sent Brent to ~$100 and coal to $345. Floods devastated crops. Inflation averaged 19.9% in 2022 and 30.8% in 2023, peaking at 38% in a single month (May 2023); the policy rate reached a record 22%. The index lost 9.4% in 2022 — but then, with an IMF deal signed and stability returning, it rose 54.5% in 2023 while rates were still 22%. Lesson three: markets move on the expected direction of the drivers, not their current level.

2024–25 · The great easing pays off. Inflation fell off a cliff — averaging 12.6% in 2024 and 3.6% in 2025 — and the SBP cut 22% → 10.5%. Money rotated out of T-bills into equities; the KSE-100 returned +84% then +51%, closing 2025 at 174,054. Banks reported record profits even as rates fell (loan growth and bond gains outran margin compression), and rate-sensitive cyclicals re-rated violently.

2026 · The jolt. The Middle East conflict pushed Brent back above $90; Pakistan's inflation climbed to a May peak near 11.7%; the SBP reversed course, hiking 150 basis points to 12% by October. In March the index suffered its largest one-day fall on record (−9.6%). Yet by November it stood at 179,335 — above where 2025 ended. The drivers turned hostile, the market wobbled, and earnings carried it. That is the mature way to read macro: a headwind, not a verdict.

Who wins, who loses — the sector map

Read this table as the market's reflexes. The columns are shocks — oil rising, rates rising, inflation rising. A falling driver mostly reverses the arrows, and the detailed sections below give both directions with the companies involved. The last column is the character note that matters most: why.

These are tendencies of earnings and sentiment across a full move, not trading signals for a single day. Individual companies sit on spectrums — a cement maker on local coal is not a cement maker on imported coal — which is why each stock page on this site shows the company's own numbers.

Driver one: oil rises

The chain: Brent up → Pakistan's import bill up → dollars out, rupee down → petrol, diesel and electricity dearer → inflation up → SBP forced toward hikes → the whole market's valuations squeezed. Inside that storm, the producers of oil are the one dry house.

Short term (days–weeks): E&P shares jump the same day; the wider index usually falls on inflation fear; refiners and OMCs book their inventory gain at the next price revision. Mid term (quarters): E&P earnings and dividends are upgraded; demand destruction builds in autos and fuel volumes; the SBP's reaction becomes the story. Long term (a year+): a sustained oil price above ~$90 has historically meant a balance-of-payments crisis path for Pakistan — reserves, the rupee, an IMF conversation — and windfall-profit taxes on the winners. The E&P trade and the Pakistan trade eventually part ways.

Driver one, reversed: oil falls

For Pakistan this is the friendliest shock in economics. The import bill shrinks, the rupee steadies, inflation falls, and the SBP gains room to cut — the 2013–16 and 2020 templates. Expect the index's energy heavyweights to drag the headline number even while most stocks rise (check breadth, not just points). Refiners and OMCs take a one-off inventory loss, then sell more fuel into cheaper prices; cement margins widen (especially if coal falls too); autos and airlines of demand — cars, tractors (MTL) — recover. The long-term catch is complacency: cheap-oil years are when Pakistan postpones reform, which is why each cheap-oil era in the table above was followed by an expensive one.

Driver two: interest rates rise

The chain: SBP hikes → KIBOR and T-bill yields up → borrowing costs up for every leveraged company and car buyer; risk-free returns up, so shares must offer more to compete; future earnings discounted harder, so valuations (P/E ratios) compress. The 2022–23 cycle took the rate from 7% to 22% — a live stress test of every balance sheet on the exchange.

Short term: almost everything dips on decision day — banks too, as their bond portfolios are marked to market. Mid term: the earnings split appears — bank profits climb, leveraged profits sink, and high-yield stocks de-rate until their yields compete with T-bills. Long term: high real rates starve investment, so capacity stops growing; the survivors emerge with pricing power. And the eventual first cut historically produces the sharpest rally of the cycle — 2023's +54% began before a single cut, on the mere expectation.

Driver two, reversed: interest rates fall

The mirror image, and the single most reliable bull-market recipe Pakistan has: 2013–16 and 2024–25 both ran on it. Money rotates out of T-bills and National Savings into equities; car financing and construction revive (autos, cement, steel volumes lead); leveraged balance sheets heal; dividend stocks re-rate upwards because a 7% yield is precious when the risk-free rate is 10%. Banks confuse beginners here — their margins compress, yet their shares usually rise, because bond-portfolio gains, loan growth and vanishing bad debts outweigh the squeeze (2024 was the proof). The risk to watch is the turn: an easing cycle that ends — as 2026's did — reprices everything that was bought on borrowed optimism.

Driver three: inflation rises

The chain: prices rise → households' real incomes shrink → discretionary demand falls; companies' costs rise → only those with pricing power protect margins; the SBP is dragged toward hikes (driver two switches on); and every rupee of future dividend is worth less today. Inflation is a tax that needs no law — including on investors: it is levied on cash at the full rate.

Think in real returns. In 2022 the KSE-100 fell 9.4% while inflation averaged 19.9% — a rupee in the index kept about 76 paisa of buying power. Cash in a current account kept about 83 paisa; T-bills, paying roughly the policy rate, did little better. In 2023 the index rose 54.5% against 30.8% inflation — a real gain of roughly 18%. The uncomfortable conclusion of Pakistan's own data: in high-inflation years, doing nothing is also a decision, and usually the worst one on the menu. The defence is owning companies that can raise prices — and collecting dividends that reset with earnings, which is why the dividend hub tracks consistency, not just yield.

Short term: a hot CPI print knocks the market the same morning (rate-hike fear) and lifts E&P and dollar earners. Mid term: margin winners and losers separate in results season. Long term: persistent inflation rewires the whole market — valuations settle lower, turnover chases nominal momentum, and savings flee toward gold, property and dollars, starving the exchange of the local bid it needs.

And coal — cement's private oil price

For one sector there is a fourth driver. Cement kilns burn coal, and Pakistan's plants have historically imported much of it. Follow the coal line in the charts: $59 a tonne in 2015 (fat margins), $345 in 2022 (margins crushed even as cement prices hit records), $136 in 2024 (margins recovered). Producers differ — blends of local and Afghan coal, and alternative fuels, soften the blow for some — but as a first approximation: coal down, cement earnings up; coal up, cement earnings down, with a quarter's lag. Read LUCK, DGKC, MLCF and FCCL results with the coal chart open. Power has its own version of the hedge: plants built on Thar coal burn a domestic fuel priced in rupees, insulated from both Brent and the import bill.

A newbie's playbook for the three drivers

Know the calendar. CPI is published in the first days of each month; the MPC meets roughly every six to eight weeks; petroleum prices are revised twice a month. Most "surprises" in this market are scheduled events whose direction the data has telegraphed.

Ask three questions of any stock. (1) How much debt does it carry, and at what spread over KIBOR? (2) Can it raise its prices as fast as its costs? (3) Is its fuel, feedstock or product priced in dollars, rupees, or by a regulator? The answers place it on the map above more reliably than any tip.

Trade the direction, respect the level. The market rose 54% in 2023 with rates at 22% because the direction of inflation had turned. It fell hardest in March 2026 not because 12% is a terrible rate, but because the direction had reversed. Position for where the drivers are going; use the level only to judge how much is already priced in.

Keep income as ballast. In every era above, the investors who survived the hostile chapters were collecting dividends from pricing-power companies while they waited. That is a strategy, not a consolation prize.

Sources: inflation — Pakistan Bureau of Statistics and World Bank CPI series; policy rate — State Bank of Pakistan rate history and 2026 MPC decisions; oil and coal — World Bank Commodity Markets (Pink Sheet) annual averages and U.S. EIA (2025 Brent); KSE-100 — year-end closes and annual returns compiled from PSX data; November 2026 figures — PBS October 2026 review and PSX close of 10 November 2026. Written by PSX Analysis as education, not investment advice. Explore the drivers yourself: sectors · screener · dividend hub.