Every two months, the State Bank of Pakistan announces its monetary policy statement. And every two months, the media collectively pretends to understand what it is saying when it reports the statement, and then goes back to its regularly scheduled programming about some random celebrity wedding. What they, and most other people, ignore is the real money making opportunity that exists if one is able to correctly read and predict the monetary policy statement.

Now, unless you are a serious macroeconomics wonk, it is unlikely that you will ever find the monetary policy statement even remotely interesting. That is quite alright. The only functional thing you need to read is the last sentence, which is where they announce what they are doing to the discount rate, the benchmark interest rate in the country. It is this rate that helps determine the cost of capital in the entire economy, which affects the rate of return investors can get on their investments.

The discount rate has no direct connection to any ordinary investor. Strictly speaking, it is the rate at which the State Bank of Pakistan is willing to lend money to banks when they run short of funds and need to borrow. It currently stands at 10 per cent. Over the past two decades, it has gone as low as 7.5pc and as high as 20pc. The State Bank determines this rate broadly by looking at what is going on with the inflation rate. The discount rate is typically (but not always) higher than the rate of inflation in the country.

Why should this interest rate matter to you? Because if this is the rate that banks can borrow at, they will typically try to lend at a rate higher than that to other businesses (barring some exceptions, but more on that in future columns). The interest rate level, in turn, determines how much businesses are willing to borrow in order to expand their operations, which in turn affects the overall economic growth rate. (There is some dispute among SBP economists over the degree to which the discount rate can affect inflation rates in Pakistan. Let us leave aside that academic debate for now.)

In other words, the discount rate — in particular, its direction, can be useful in understanding whether or not good favourable economic conditions are set to last. Here is a rule to remember: the discount rate typically goes up during a recession and the early part of an economic recovery. It tends to go down during a period of economic expansion. So what is it doing right now?

Well, as of right now, the discount rate has stayed stable at 10pc for the past 10 months. Had Imran Khan and the PTI not staged their prolonged dharna, the State Bank would most likely have reduced the rate, largely because inflation has stayed relatively tame over the past several months, at least by historical Pakistani standards. Most analysts project that the discount rate will eventually be decreased within the next few months.

So what does that mean for your personal investments? Well, it means that the bull run in the stock market will likely continue for some time and thus you can safely invest in stocks. Credit remains relatively easy for businesses to access, which means that they will continue to be able to expand and thus their profits will continue to increase, at least in the short run.

However, there is a huge caveat to using the interest rate as an economic indicator when it comes to personal investing: it does not tell you when the economy is about to go sour. For example, the discount rate was lowest in the period between November 2002 and April 2005. If you had invested in a portfolio mimicking the benchmark KSE-100 index during that time, you would have made 196pc over the full period, or about a 57.4pc average annualised rate of return.

However, even though the discount rate started going up in 2005, so did the stock market. Eventually, the stock market did crash, but if you had sold all your stock investments in 2005, you would have missed out on an even bigger bull run.

Between April 2005 and April 2008, when the market hit its pre-crisis peak, the KSE-100 index went up by 126pc, or an annualised rate of 31pc, slower than before, but still a very strong rate of return.

In other words, there are no certainties when it comes to the world of investing (or really anywhere else in life, for that matter). The discount rate is a useful indicator that the economy has started to slow down, but may not always be a good signal that it is a good time to exit the market. Nevertheless, understanding what the direction of change in interest rates means can help you make better investing decisions.

Published in Dawn, Sunday Magazine, October 5th, 2014