WHAT IS MONETARY POLICY….???

Monetary Policy is the process bywhich the monetary authority of acountry controls the supply of money,often targeting the interest rate for

thepurpose of promoting economic

growth and stability .

According to Harry G. Johnson

“Monetary policy employing the central bank’s control of supply of money as an instrument for achieving the objectives of general economic policy.”

EXPANSIONARY

Increases the total

supply of money in

the economy more

rapidly than usual

Expands the money supply more slowly than usual or even shrinks it.

ContractionaryTypes Of Monetary Policy

EXPANSIONARY MONETARY POLICY…

The following three monetary policy

measures are adopted as a part of an

expansionary monetary policy to cure

recession & to establish the

equilibrium of national income at

full employment level of output.

The central bank undertakes open market operation

The central may lower the bank rate The central bank may reduce cash reserve

ratio

TIGHT MONETARY POLICY…

The following monetary measures

generally adopted as tight monetary

policy to control inflation

The central bank sells the Government securities

The central bank may raise bank rate The central may raise statutory cash reserve

ratio

MONETARY POLICY :KEYNESIAN VIEW

Problems : Recession & Unemployment

Measures :1. Central bank buys securities through

open market operation

2. It reduces CRR

3. It lowers bank rate

Problem : Inflation

Measures : 1. Central bank sells securities through

open market operation

2. It raises CRR & SLR bank rate

3. It raises maximum margin against holding of stocks of goods

EXPANSIONARY MONETARY POLICY

TIGHT MONETARY POLICY

Money supply increase

Interest rate falls

Investment increase

Aggregate demand increase

Aggregate output increase

Money supply decrease

Interest rate decrease

Investment expenditure declines

Aggregate demand declines

price level falls

OBJECTIVES OF MONETARY POLICY….

There are basically three major objectives of

Monetary Policy. Which are:- To ensure price stability. To encourage economic growth. To ensure stability of exchange rate of

money.

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IMPORTANCE OF MONETARY POLICY……

Regulates currencies and reserves. Manages the monetary and the

credit system. Maintains the par value of

domestic currencies. Promotes and maintains a high

level of production , employment and economic growth.

Ensures balance of equilibrium. Creates full employment. Regulates neutrality of money. Ensures equal income distribution.

TOOLS OF MONETARY POLICY…. There are Three basic tools or instruments of monetary policy which can be used to achieve economic & price stability by influencing aggregate demand or spending in the economy .These tools are:-

Open market operation.

Discount Rate/Bank rate.

Cash Reserve Ratio.

OPEN MARKET OPERATIONS

The buying and selling of government securities by the Reserve Bank on secondary

markets

OPEN MARKET OPERATION:

OMO is a tool of Monetary Policy. Its involves Buying & Selling of Govt. securities

by the State Bank Of Pakistan(SBP) to influence the volume of cash reserves with commercial banks & thus influence their loans & advances.

To contract the flow of credit, SBP starts selling Govt. securities.

To increase the credit flow SBP starts purchasing the Govt. securities.

SECOND TOOL: DISCOUNT RATE

The interest rate charged by Federal Reserve Banks to depository institutions on short-term loans.

DISCOUNT RATE:

Discount rate is the rate of interest charged by central bank for providing loans or funds to the banking System.

Raising bank rate raises cost of borrowing by commercial banks, causing reduction in credit volume to the banks & decline in money supply.

Funds are provided either through lending interest rate or rediscounting or buying Commercial bills.

'RESERVE RATIO'

The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the U.S. is the Federal Reserve. The reserve ratio affects the money supply in a country. 

This is also referred to as the "cash reserve ratio" (CRR).

GOALS OF MONETARY POLICY

Stability in

foreign

exchange

market

Price stability High

employment

Economic growth

Financial markets stabilityInterest rate

stability

PRICE STABILITY

“The situation whereby the prices of goods and services offered in the marketplace either change very slowly or do not change at all. Factors affecting this include employment

 and inflation

HIGH EMPLOYMENT

“…does not mean that unemployment is at

zero”

ECONOMIC GROWTH

“…ensuring that resources are not idle”

STABILITY OF FINANCIAL MARKETS

“…crises can interfere with

the main function”

INTEREST-RATE STABILITY

“…fluctuations can create

uncertainty in economy”

STABILITY IN FOREIGN EXCHANGE MARKET

“…stability makes it easier for businesses to plan ahead”

EXECUTIVE SUMMARY OF PAKISTAN 2013:

1. Weak economic management and low productivity are the causes of slower economic growth in Pakistan.

2. After mixing up sudden global economic crisis with energy shortage and security conditions in domestic economy have also not create a helpful situation for Pakistan.

3. Reducing and financing of domestic and external deficits could not the adopted because of struggling economical conditions of Pakistan.

4. Rapid increase in fiscal borrowing and a secular decline in domestic and foreign investment are the reasons of structural issues.

5. The role of monetary policy was always going to be limited in this environment; both in terms of keeping inflation low and stable and supporting private investment activity.

6. From last two years, the State Bank of Pakistan did lower its policy rate by 500 basis points for deceleration in inflation.

7. The State Bank of Pakistan also interrupts in financial markets by applying a minimum savings deposit rate at 6% and containing volatility in the foreign exchange market.

8. The year-on-year increase in fiscal borrowings from scheduled banks has been around 56% on average during the last four years.

9. No government defaults on its domestic debt, this indicates that fiscal borrowings from the State Bank of Pakistan could continue, which carries inflation risks in the medium term.

10. A result, despite reduction in the external current account deficit by about half, to $2.3 billion or 1.0 percent of GDP.

11. A projected external current account deficit of $3 billion or 1.2 percent of GDP, improvement in financial flows would help in building foreign exchange reserves. 12. Before analyzing the projected inflation path, it would be useful to understand that inflation has been on a declining trend since December 2010. 13. As a result, the composition of monetary aggregates is likely to improve in favor of Net Foreign Assets (NFA) of the banking system. 14. Similarly, a considerable increase in public debt to revenue ratio reflects weak repayment capacity of the government. 15. Speculative sentiments in the market prior to the new IMF program were a major reason for this accelerated depreciation. 16. The outlook of oil prices may deteriorate as well given escalating political tensions in the Middle East. 17. The government has announced considerable upward adjustments in electricity prices, affecting the inflation outlook. 18. First, the lagged effect of an overall economic slowdown during the last five years. 19. The main reasons for this broad-based deceleration in inflation are threefold. 20. Second, stable international prices of major imports such as palm oil, petroleum crude and products, and raw cotton together with modest exchange rate depreciation. 21. Third, bank-financed subsidies of the government that kept administered prices under check. 22. The last factor also explains the apparent disconnect between high growth and decelerating inflation. 23. The sustainability of these subsidies and the overall fiscal position was always questionable and it was just a matter of time before these administered prices had to be adjusted.