MONETARY POLICYRegulated authority

STATE BANK OF PAKISTAN

Sameera Dar 1542Sobia Ikhlaq 1548Kiran Zahra 1550Saba Khursheed 1541Sana Khalid 127

Salma Bashir 126Nasiba Waris 139

SAMEERA DAR

Roll no # 1542

Facts and FiguresCentral Bank of:    PakistanEstablished: 1947Headquarters: KarachiGovernor: Shamshad AkhterOfficial website: www.sbp.org.pk

Monetary Policy It is a policy of central bank to control

the supply of money with the aim of achieving macro economics stability.

(Harry Johnson)

Characteristics Tool used by the national govt. to influence

the economyControls the supply and availability of moneyControls the cost of money (interest)Contrasted with fiscal policy

SOBIA AKHLAQ

Roll no # 1548

OBJECTIVES OF MONETRY POLICY

Full EmploymentIncrease in the productionIncrease in the investment Economic developmentStability of Capital Market

Proper Distribution of Wealth

Exchange Rate Stability

To increase Exports

Improvement in standard of living

Price Stability As Basic Objective

Improving the transparency of the price mechanism,

Reducing inflation risk premier in interest rates.

Avoiding unproductive activities to hedge against the negative impact of inflation or deflation.

Reducing distortions of inflation or deflation,

Preventing an arbitrary redistribution of wealth and income as a result of unexpected inflation or deflation.

BENEFITS OF MONITRY POLICY

• Short run- Monetary Policy Transmission Mechanism

• Long-run Neutrality of Money

• Inflation – a Monetary Phenomenon

KIRAN ZAHRA

Roll no # 1550

• In practice all types of monetary policy involve modifying the amount of base currency (M0) in circulation.

• This process of changing the liquidity of base currency through the open sales and purchases of (government-issued) debt and credit instruments is called open market operations.

DIFFERENCE BETWEEN THE VARIOUES TYPES OF MONETARY

POLICY

Inflation Targeting

• Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range.

Price Level Targeting

• Price 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 move.

Monetary Aggregates • In the 1980s several countries used an approach

based on a constant growth in the money supply. • This approach was refined to include different

classes of money and credit (M0, M1 etc) • This approach is also sometimes called monetarism.

Fixed Exchange Rate • This policy is based on maintaining a fixed

exchange rate with a foreign currency.• There are varying degrees of fixed exchange rates,

which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation.

MIXED POLICY• In practice a mixed policy approach is most like

"inflation targeting". • However some consideration is also given to other

goals such as economic growth, unemployment and asset bubbles. This type of policy was used by the Federal Reserve in 1998.

SABA KHURSHEED

Roll no # 1541

Risk & Challenges Faced By Monetary policy

• 2008 has been a difficult year for global economy including Pakistan. it is facing many challenges & risks

such as,• Turbulent state of international financial market & downgrading pak’s rating by international organization.• Growing global commodities prices, oil & food prices.• Growing external a/c deficit.• Depreciation of rupee against us doller.• Gap b/w demand and supply

Trends Followed By Current Monetary policy

As Pakistan follows tight monetary policyMajor trends followed by Pakistan's current monitory policy are,Heavy Govt borrowing from SBP diluted the impact of monitory measures of Jan 2008The monitory tightening in Jan 2008 helped in draining inter banks liquidity & pushing interest rates up.

Banks lending rates are move up & has risen 12.8%

June 2008 from 10.9% recorded in April 2008.

Due to inflation real return on deposits decreases

17.8% to13.9% in 2008.

Growth sustainability demand, stimulating

investment a consumption not for driver of

economic growth.

Gap in B.O.P was almost us $5.8 billion.

Reduced foreign exchange reserve increase pressure

on F. exchang rate.

Fiscal deficit rose sharply & expended to above 8% of GDP against 4% est target for FY 2008.

Govt borrowing from SBP increased & reached at double of Rs 1053billion.

Private sector credit grew by 17.3%& reached Rs 408.4 billion.

Due to change in composition of monetary aggregates NDA Dec from Rs 316.4billion to 274.6 billion

Inflationary pressure in economy increased considerably.At present the risk of inflationoverall macro economic stabilityfar greater than the risk to economic growth & needs necessary stabilization measures.

SANA KHALID Roll No.127

1.Changes in Bank Rate Policy or Rediscount RateRate at which central bank gives loans to commercial banksCentral bank charges 10% as bank rate To control inflation central bank increases the rate of interest

2. Open Market Operation Central bank sells or purchases government securities To remove inflation they sell the government securities Commercial banks will purchase these securities to earn

interest

Tools of Monetary Policy 1.Quantitative Methods

3.Change in Reserve RequirementsCommercial bank has to keep certain proportion of its deposits in the form of reserves

30% of its deposits to meet the needs of its depositors

Commercial banks are advancing excessive loans

Central bank Increases the reserve requirements

4. Changes in Marginal Requirements Commercial banks do not give loans against leaves

They ask for pledges to make

Pledge are settled by the central bank. If there is inflation, the marginal requirements will

increase by central bank

5. Changes in Reserve Capital Commercial bank has to keep 5% of its deposit in the central bankBy changing reserve capital, central bank can control the supply of money To remove inflation, they will increase the reserve ratio

6. Credit Ceiling/Rationing of Credit Central bank can issue directions Loans will be given to commercial banks up to a certain limitCommercial banks-will be careful in advancing loans

Qualitative Methods1. Moral Suasion

Moral request by central bank to commercial banks Loans should not be given for unproductive fields Loans should not be given for speculative purposes and hoarding

2. Consumers Credit Control Applied during inflation If the central bank wants to control the supply of money

central bank issue directions to commercial banksLoans should not be advanced for consumption

purposes

3.Direct Action Concerned with the policy of central bank against commercial banks Central bank will not advance loan to commercial banks for the sectors

which create inflation

4.Publicity Central bank keeps an eye over the activities of the commercial banks If the commercial banks are found advancing loans

which create inflation The central bank can black list such banks

SALMA BASHIR

Roll no # 126

Effectiveness of Monetary policyAccuracy of inflation forecasts - try to reduce inflationary pressures before they occur

Interest Elasticity of Demand - measures how responsive demand is to a change in interest rates

Levels of Government debt - High levels of government debt generally put upward pressure on interest rates

Effects of interest rates not equally shared

Inflation expectations

MONETARY POLICY STATEMENT

July – December 2008

Monetary Policy Statement

Economic Environment and SBP’s Policy Response during H2 FY08‐Growth rate is expected to slide from 8 percent in 2007 to 6.9 percent in 2008.

Strong trends in inflation has emerged for this many central banks have raised their policy rates in order to control inflation

Strong aggregate demand and a rise in the international commodity prices resulted in an increase of external current account and fiscal deficits

International oil prices rises to US$125/barrel

International food prices have reached to US$23.4 per 100

pound

FY08FY07 Target/

ProjH1 Year

Fiscal deficit (% of GDP) 4.3 4 3.6 8.3SBP financing ( bln Rs) -58.6 -62.3 201 689C.A. deficit (% of GDP) 4.9 5.0 3.6 8.4Trade deficit (% of GDP) 6.8 8.3 3.7 15.3Exchange rate2 (Rs/US$) 60.4 - 61.7 68.3

Forex reserves ( bln $) 15.6 - 15.6 11.4YoY M2 growth in % 19.3 13.7 19.9 15.4Avg. Inflation % 7.8 6.5 8.0 12.0NFNE (YoY) % 5.7 - 7.2 13.020% trim (YoY) % 6.5 - 8.7 17.2Real GDP growth in % 6.8 7.2 - 5.8

Due to an increase in international oil and food prices, growth moderated, and the combination of growing demand and reduced supply increased inflationary pressures

Monetary Policy Statement

The second half of FY08 particularly proved difficult for Pakistan’s economy

Fiscal deficit raised to 488.1 billion (8.3 percent of GDP).

Balance of payments pressures were increased as the expenditures continued to rise, while revenue growth lagged.

80 percent expenditure overruns are due to delay in pass through of international oil prices and other subsidies and underestimation in current expenditures.

Non food group accounts for 59.7 percent in the CPI basket‐

Multiple monetary policy measures announced by SBP on May 22, 2008 are:

rise in the policy rate by 150 bps to 12 percent

increase in CRR to 9 percent

floor on banks’ savings/PLS deposit and L/C margin on all imports excluding oil and selected food products at 35 percent.

Monetary Policy Statement

rise in interest rate resulted in declining of aggregate demand through consumption or investment expenditure.

demand for goods and services as measured by real GDP less net exports raised from 5 percent to 7.2 percent

growth in supply of goods and services as measured by the real GDP slowed down to 5.8 percent from 6.8 percent

To meet the liquidity requirements banks started reducing their surplus holdings of government securities – i.e. commercial banks’ holdings of government securities over and above SLR requirement

Monetary Policy Statement

NSIBA WARIS

Roll no # 139

Limitations of monetary policyOrganized capital marketExistence of eligible billsBank rate and other interest ratesWillingness of banks

Organized capital market• The success of monetary policy

depend upon the availability of organized capital market. If capital market is not organized then central bank has to face difficulties in controlling credit and implementing monetary policy.

Existence of eligible billsIn the absence of eligible bills ,bank rate is not very effective. If the commercial bills do not have adequate eligible bills ,they cannot change the practice of rediscounting of bills according to the changes in bank rates.

Bank rate and other interest rates• The bank rate policy becomes

effective only when the bank rate influences the lending rates .The relationship between these rates does not exist where the money market is not organized.

Willingness of banks

• The open market operation will not be successful if the commercial banks are not really interested in it so the banks are willing to absorb securities.

The commercial banks should maintain only a minimum cash

reserve and depend upon the central bank for obtaining

reserve.

The central bank requires that the quantity of money should be

increased or decreased to influence the price level.

The bank rate policy should effective only when the lending

rates of commercial bank are affected by changes in bank rate.

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