MONETARY POLICYMONETARY POLICY

Presented by:

•Natasha Shaikh

•Manisha Valicha

•Babar Hassan

MONETARY POLICY

• What is Monetary Policy ?• Monetary Policy Objectives

― Price stability― Economic growth― Maintaining the Exchange Rate― Constrain Inflation or Deflation― Achieving Full Employment

• Monetary Policy Mechanism

Macroeconomic management team sets targets for economic growth and inflation

Monetary and Fiscal Policies Coordination Board adopts the targets

SBP determines the safe limit of monetary expansion consistent with targets

Estimates are presented to the SBP Central Board for its approval

The SBP estimates the credit requirements of the private sector

Credit plan Approved by the SBP Central Board is forwarded to the Ministry of Finance to formulate the budget

A quarterly review of developments is undertaken and macro policy indicators reviewed in meetings of the Monetary and Fiscal Policies Coordination Board

The SBP estimates the scope for government borrowing from the banking system

The SBP implements monetary policy through market based instruments

• Instruments of Monetary Policy: Quantitative

― Open Market Operations― Reserve Requirement Ratio― Discount Rate― Credit Rationing― Exchange Rate

Qualitative― Moral Suasion

Expansionary Policy

It is to INCREASE the

TOTAL SUPPLY of MONEY

in the ECONOMY to raise

the Aggregate Demand

Tools

1. Reduce Bank Rate

2. Reduce Cash Reserve Req.

3. Reduce Selective Credit Control

4. Buying Back of Securities in Open Market Operations

5. Reduce or Relax Credit Quotas

Contractionary Policy

It is to DECREASE the TOTAL SUPPLY of MONEY in the

ECONOMY to lower the Aggregate Demand

Tools

1. Increase Bank Rate

2. Increase Cash Reserve Req.

3. Impose Selective Credit Control

4. Selling of Securities in OMO

5. Impose Credit Quotas

Expansionary v/s Contractionary Policy

MONETARY POLICY APPLIED BY SBP

Various challenges • Drain of liquidity from the financial system• Rising global commodity, oil and staple food

prices• Depleting foreign reserves due to

disinvestment by foreign investors• Surge in import bill• Devaluation of the Rupee

Liquidity Crisis

Corrective actions • Increased the discount rate• Reduced the CRR

Effects of the monetary policyAssociated Risks

Conclusion• Monetary policy goals • Factors involved in failure of market-based monetary

policy

• Challenges to Monetary Policy

Criticism on the Monetary Policy• High interest rate would further push up the cost of

production, thus destroying industries• Inflation cannot be controlled by tight monetary policy• Discount rates failed to induce banks to invest in T-bills

U.S.A - MONETARY POLICY

• The object of monetary policy is to influence the performance of the economy as reflected in such factors as inflation, economic output, and employment.

Monetary policy tools

• Monetary base

• Open market operations

• Monetary policy implementation issued by the ECB in 2009

• Reserve requirements

• Discount window lending

• Interest rates

THE BAILOUT PLAN

• Bush administration proposed $700 Billion

• Bail out plans criticism

• Plan’s course reversed

• The Treasury also used the bailout

• General Motors and Chrysler afloat

• Citigroup and the Bank of America

• Obama’s officials preparing a $50 billion

MONETARY POLICY: Pakistan Vs America

U.S.A

• Crisis response

• Collateral and rate setting

• Risk management

• Longer-term issues

PAKISTAN

• Drain of the liquidity from the financial system

• rising to Global commodity and food prices

• Depleting foreign reserves

U.S.A

• Open market operations

• Central bank liquidity swaps

• Lending to depository institutions

• lending to primary dealers

PAKISTAN

• Disinvestment by foreign investors

• Surge in import bill

• Devaluation of the Rupee