monetary policy state bank of paistan

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TYPE OF POLICIESTYPE OF POLICIES

Monetary Policy (SBP)To manage Money supply in order to achieve specific goals such as constraining inflation or deflation, maintaining exchange rate, achieving full employment or eco growth.Monetary Policy is made Semi annually & reported quarterly

Fiscal Policy (Ministry of Finance)Related to Gov Expenditure & taxes, policies made to dec inflation & increase GDP grown.

Trade Policy

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MONETARY POLICYMONETARY POLICYOverviewMonetary policy rests on the relationship b.w the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money.

Interest rate↑1/α (inversely proportional to) Money supply ↓Interest rate ↑ Savings ↑ Flow of money in market ↓ investment ↓ RGP ↓Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies & unemployment,

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MONETARY POLICYMONETARY POLICYTypes of Monetary Policies Expansionary

In expansionary policy you increase the flow of money supply by putting money in marketMoney Supply ↑ Inflation ↑ Price ↑ Contractionary

In contractionary policy you decrease the flow of money supply by taking out money from the market

Money Supply ↓ Inflation ↓ Price ↓

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MONETARY POLICYMONETARY POLICYObjectives of Monetary Policy Inflation Targeting Price level Targeting Monetary Aggregates Fixed Exchange Rates Mixed policy

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Inflation TargetingUnder this policy approach the target is to keep inflation under a particular definition such as (CPI) Consumer Price Index at a particular level

Pakistan Monetary policy objectives 2001 - 20072001 – 2004 June – Expansionary2004 July – 2007 – Inflation Targeting

MONETARY POLICY MONETARY POLICY OBJECTIVESOBJECTIVES

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Price Level TargetingPrice level targeting is similar to inflation targeting except that CPI growth in one year is offset in subsequent years such that over time the price level on aggregate does not not move



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Monetary AggregateUnder this policy approach there might be more then 2objectives e.g. increasing economic growth & decreasing inflation which means using a balance of expansionary & contractionary policies



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Tools of Monetary PolicyTools which are used to achieve monetary policy objectives

Monetary Base Open Market Operation Reserve Requirements Discount Window Lending Interest Rate

MONETARY POLICY MONETARY POLICY TOOLSTOOLS

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Monetary BaseMonetary policy can be implemented by changing the size of the monetary base. This directly changes the total amount of money circulating in the economy. A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base Currency Base & typesM0 = Reserves & money in circulationM1= Current DepositsM2= Current Deposits + Saving AccountsM3= Transfer checks, Credit cards, debit cards, paychecks etc.


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Open Market OperationA central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering the monetary base

If Bonds, & other reserves are auctioned then SBP will get cash which will decrease the money flowing in market & vice versa Money Supply ↓ Inflation ↓ Price ↓ Money Supply ↑ Inflation ↑ Price ↑ (if SBP buys from market)


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Reserve RequirementsThe monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. If SBP increase the reserve rate from 15% to 20% means now every commercial & private bank has to deposit 20% of their hard cash in SBP which will result in decrease of money available in market means money supply will decrease & vice versa Money Supply ↓ Inflation ↓ Price ↓ (if rate increase from 15% to 20%) Money Supply ↑ Inflation ↑ Price ↑ (if rate decreases from 15% to 10%)

SBP CURRENT RESERVE REQUIRMENT IS 15%SBP CURRENT RESERVE REQUIRMENT IS 15%


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Discount Window LendingMany central banks or finance ministries have the authority to lend funds to financial institutions within their country. By calling in existing loans or extending new loans, the monetary authority can directly change the size of the money supply.

The objective of any bank is to get the money quickly, if bankB is giving money in period of 1year which is too late, then SBP will become a 3rd party & will lend the desired loan within 1month but will charge some interest on it, this interest rate can alter the money supply in market

Money Supply ↓ Inflation ↓ Price ↓ (if high interest rate is charged) Money Supply ↑ Inflation ↑ Price ↑ (if low interest rate is charged)


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Interest Rate In this method interest rate is forced on market supply which alters the money supply, but this method is not practiced because open market operation is used instead.


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It is important for policymakers to make credible announcements regarding their monetary policies

policymakers must have credible announcements, that is, private agents must believe that these announcements will reflect actual future policy current monetary policy has a goal to reduce inflation from

9.5% to 7.0%

MONETARY POLICY MONETARY POLICY THEORYTHEORY

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Dr Dr Shamshad AkhtarShamshad Akhtar was appointed by the was appointed by the President of Pakistan as the governor of the State President of Pakistan as the governor of the State Bank of Pakistan for three years in December 2005. Bank of Pakistan for three years in December 2005. She is the 14th governor of the State Bank and the She is the 14th governor of the State Bank and the first female to assume this position. She was first female to assume this position. She was previously with the Asian Development Bank.previously with the Asian Development Bank.

STATE BANK OF STATE BANK OF PAKISTANPAKISTAN

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First it outline the measure taken by the government & SBP to strengthened the monetary policy.

Second it tells the key elements of the current monetary policy stance.

Third, it tells the impact of SBP policy actions and challenges in its implementation.


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Two roles of State Bank of Pakistan are:

Monetary Policy Management. Financial Sector Stability.


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Monetary segment in the economy deals with:

The changes in Stock and flows of Money Supply. The trends in its subsumes and defuses the impact of developments of fiscal and balance of Payments.

MONETARY MODULEMONETARY MODULE

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Monetary Policy of Pakistan, in line with SBP has three objectives:

Promoting Economic Growth Price Stability Soundness and stability of financial markets

OBJECTIVE OF OBJECTIVE OF MONETARY POLICYMONETARY POLICY

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In mid 1990’s SBP shifted its reliance from an Administered Monetary policy to Market oriented Monetary Policy.

And where it relied more on interest rate to serve as a policy fulcrum & developed its capacity to manage financial markets and related activities.

SBP and Central Bank Adopted “3 day SBP discount rate” as a major policy instrument.

CHANGES IN CHANGES IN MONETARY POLICYMONETARY POLICY

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The adoption of “3 day SBP discount rate” responded to demand pressure in the economy and resulted in Increase Monetary liabilities Increase Monetary Asset. Growth in Currency. Growth in Private sector income. Growth in National income. Growth in Government borrowing.

CHANGES IN CHANGES IN MONETARY POLICY MONETARY POLICY

MANAGEMENTMANAGEMENT

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In 1997, SBP and its Central board established “Monetary and Fiscal Coordination Board” to ensure the fiscal policy is well coordinated with the Monetary policy.

Specific provision of SBP act mandates Central board to impose limits on Government’s central bank borrowing.

SBP institutionalized the “Open Market Operation” process with better flexibility.

And in 2005, SBP introduced the Money Market Computerized Reporting system (MM_CRS) for banks which helps in assessing the market liquidity.

In 2005, SBP Brought the “Fiscal Responsibility and Debt Limitation law” which requires the government to reduce its budget deficit to zero by 30th June 2008.

And reduce the public debt to 60% of GDP by 2013.

CHANGES IN CHANGES IN MONETARY POLICY MONETARY POLICY

MANAGEMENTMANAGEMENT

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It is the monetary policy that determines the behavior of the price level over the long run. Monetary policy prevents the an effect on rate of inflation over a more extended period. Core inflation a guide to the appropriate setting to the

monetary policy stance. price level shocks that increase prices that can be controlled

by monetary policy and also increase the inflation that cant be controlled by the monetary policy No inflation is not merely and end in itself but means to good

over all economic performance The main cause of high interest rate is high inflation but we

need high inflation in order to achieve long run low inflation.

CURRENT MONETARY CURRENT MONETARY POLICY STANCEPOLICY STANCE

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Increase of the policy discount rate in order to decrease demand pressure but these demand pressure increased again in April 2005 due to increase in international oil price & due to an earth quake which resulted in further increase in the policy Discount rate by 50bp

Impact of monetary tightening on decreasing inflation was visible in 20 to 18months HOW? Aggregate demand pressure moderated, CPI felt to 7.9%

within the target of 8% & continue to decline to 7.7, Core inflation still being low at 5.4%are expected to enhance the level of net foreign assets and

result in monetary expansion


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CPI is still above its annual target of 6.5% due to the following factors that destructed the impact of monetary tightening

1)Food prices remain volatile during 2007 due to supply destruction2)High fiscal pressure resulted in greater then planned recourse to the SB borrowing3)Heavy borrowing from commercial bank seems to have crowding out private sector borrowing for long term investment as bank find it convenient to park their funds in gov security rather then lending4)SBP being mandated to provide higher then projected for the textile sector5)Higher then expected foreign inflows

The above factors has resulted in 16.9% growth in (N1)reserve money, 17.2% increase in broad money supply (N2)Proper liquidity manner in order to avoid opposite effect of monetary pol


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By march 2007 core inflation has come downn to as low as 5.4% which is 1.25% point lower thatn the 6.7% level recoreded during the crresponding period last year


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The current monetary policy appears to be reducing the excess Demand The current monetary policy appears to be reducing the excess Demand Pressure from the economy, that is targeting inflation but not at a cost of Pressure from the economy, that is targeting inflation but not at a cost of economic growth.economic growth.

The adverse effect of higher interest rates on competitiveness and/or The adverse effect of higher interest rates on competitiveness and/or growth are ill founded as the real interest rates in Pakistan are low relative growth are ill founded as the real interest rates in Pakistan are low relative to its competitors.to its competitors.

Monetary policy can not control inflation until & unless there is a proper Monetary policy can not control inflation until & unless there is a proper monetary managementmonetary management

Government should limit their borrowing & should borrow money from Government should limit their borrowing & should borrow money from SBP instead of taking money from foreign countries, because borrowing SBP instead of taking money from foreign countries, because borrowing money from SBP results cheap agreementmoney from SBP results cheap agreement

SBP should be given power, should be independent, should get SBP should be given power, should be independent, should get autonomy, so that it can easily communicate & carry out long term plansautonomy, so that it can easily communicate & carry out long term plans

CONCLUSIONCONCLUSION

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Presented byPresented bySaad JavedSaad Javed

Shaheera SulemanShaheera SulemanBisma ChistiBisma Chisti

monetary policy state bank of paistan

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