Karachi shares fall on rate rise

Pakistan's economy is suffering from high inflation and lending costs

Pakistan's main stock index has slipped almost 5% after the country's central bank raised interest rates to 12.5% from 10% to slow the inflation rate.

The Karachi Stock Exchange's 100 share index shed 615.26 points, 4.5%, to an eight month low of 13,011.74.

The KSE index is down 17% from its peak at the end of April amid growing anxiety over the economic outlook.

Rising food prices and a growing company and consumer debt burden are to blame for the worries, analysts say.

Investors had not expected such a leap in interest rates, designed to dampen consumer price growth which hit 17% in April.

Atif Malik, head of research at JS Global Securities, said the State Bank of Pakistan's move "will help it arrest inflation and meet other macroeconomic targets, but it will slow down economic growth".

"The cost of doing business will certainly increase," he added.

Negative sentiment

This prognosis for Pakistan's economy comes after five years of steady growth that was fuelled by an increase in borrowing and spending.

The KSE index benefited, climbing by about 47% in 2007 and making it one of the best-performing stock markets in Asia last year.

But with steeper interest rates, which have pushed up lending costs, Pakistan's period of strong economic growth looks to be coming to an end, analysts believe.

In addition, in-fighting between the ruling parties that make up the new coalition government has exacerbated uncertainty in the country.

Nine cabinet ministers from ex-prime minister Nawaz Sharif's party have handed in their resignations in protest at the failure to restore judges sacked by President Pervez Musharraf.

Analysts have called the move a huge setback for Pakistan's political stability.