April 9 (Bloomberg) -- Pakistan’s benchmark stock index may rise to 9,000 by the end of the year amid signs of an improving economy, extending gains that have made the market the world’s third-best performer this year, Credit Suisse Group said.

Government data will probably show inflation slowing to 18.5 percent last month from 21.1 percent in February, allowing the central bank to lower interest rates even as the nation’s external account and foreign currency reserves improve, analyst Farid Khan said in a report today. The forecast of 9,000 means the Karachi Stock Exchange 100 Index may rise 23 percent from yesterday’s close.

The KSE 100, as the index is also known, has rallied 25 percent this year, lagging behind only measures in Peru and China, according to data tracked by Bloomberg. The Pakistani gauge plunged a record 58 percent last year amid political upheaval. Stocks on the index now trade at 6.1 times estimated 2010 earnings, the cheapest in Asia.

“The markets will continue to follow the trend on interest rates, external accounts and foreign currency reserves,” Khan said. “If these indicators maintain their health trend, the medium-term outlook for the KSE 100 remains bullish.”

The analyst had previously predicted in a March 16 report that the KSE 100 will rise to 8,000 by the end of 2009 amid easing political tensions.

Pakistan’s economy, the second largest in South Asia, has started showing signs of improvement, with inflation set to drop in the current quarter, the central bank predicted on April 4. It repeated an earlier forecast that economic growth will be between 2.5 percent and 3.5 percent.

‘Opportunity to Accumulate’

Easing inflation means the central bank could lower interest rates by 100 basis points this month and a further 200 basis points by July, Credit Suisse estimated. A basis point is 0.01 percentage point.

Still, gains this year may have already priced in the outlook for lower rates and shares should take a breather before resuming a rally, Khan added.

“Any correction in the market could be an opportunity to accumulate,” the analyst said, without naming any stocks.

Pakistan stocks plunged last year as former military dictator Pervez Musharraf was ousted from office and political wrangling paralyzed the ruling Pakistan Peoples Party.

Regulators imposed trading curbs from Aug. 27 to Dec. 15 preventing stocks from falling below August closing prices. MSCI Inc. removed the country from the MSCI Emerging Markets Index in December because of the restrictions on selling stock.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.

Last Updated: April 8, 2009 23:10 EDT