Banking Law Monetary Policy 1231598267812073 1

8/2/2019 Banking Law Monetary Policy 1231598267812073 1

1/49

MONETARY POLICYRegulated authority

STATE BANK OF PAKISTAN


2/49

SAMEERA DAR

Roll no # 1542


3/49

Facts and Figures

Central Bank of: Pakistan

Established: 1947

Headquarters: Karachi

Governor: Shamshad Akhter

Official website: www.sbp.org.pk


4/49

Monetary Policy

It is a policy of central bank to

control the supply of moneywith the aim of achieving

macro economics stability.

(Harry Johnson)


5/49


6/49

CharacteristicsTool used by the national govt. to

influence the economyControls the supply and availability of

money

Controls the cost of money (interest)Contrasted with fiscal policy


7/49


8/49

Full Employment

Increase in the production

Increase in the investment

Economic development

Stability of Capital Market


9/49

Proper Distribution of Wealth

Exchange Rate Stability

To increase Exports

Improvement in standard ofliving


10/49

Price Stability As Basic

Objective


11/49

Improving thetransparency of the price

mechanism,

Reducing inflation risk

premier in interest rates.


12/49


13/49

Preventing anarbitrary

redistribution ofwealth and income as aresult of unexpected

inflation or deflation.


14/49

BENEFITS OF

MONITRY POLICY


15/49

Short run- Monetary Policy

Transmission Mechanism

Long-run Neutrality of Money

Inflation a Monetary

Phenomenon
http://www.ecb.int/mopo/intro/html/transmission.en.htmlhttp://www.ecb.int/mopo/intro/html/transmission.en.html


16/49

In practice all types of monetary policy involvemodifying the amount of base currency (M0) incirculation.

This process of changing the liquidity of basecurrency through the open sales and purchasesof (government-issued) debt and creditinstruments is called open market operations.


17/49

DIFFERENCE BETWEEN THE VARIOUES TYPESOF MONETARY

POLICY


18/49

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.


19/49


20/49


21/49

Fixed Exchange Rate

This policy is based on maintaining a fixedexchange rate with a foreign currency.

There are varying degrees of fixed exchange rates,which can be ranked in relation to how rigid thefixed exchange rate is with the anchor nation.


22/49

MIXED POLICY

In practice a mixed policy approach is most like"inflation targeting".

However some consideration is also given to othergoals such as economic growth, unemployment andasset bubbles. This type of policy was used by theFederal Reserve in 1998.


23/49

SABA KHURSHEED

Roll no # 1541


24/49

Risk & Challenges Faced By Monetary policy

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

such as,

Turbulent state of international financialmarket & downgrading paks 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


25/49


26/49

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.


27/49


28/49

Inflationary pressure in economyincreased considerably.

At present the risk of inflation

overall macro economic stabilityfar greater than the risk to economic

growth & needs necessary

stabilization measures.


29/49

SANA KHALID

Roll No.127


30/49

1.Changes in Bank Rate Policy or Rediscount Rate

Rate at which central bank gives loans to commercial banks

Central 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 securitiesTo remove inflation they sell the government securities

Commercial banks will purchase these securities to earn

interest

Tools of Monetary Policy1.Quantitative Methods


31/49

3.Change in Reserve Requirements

Commercial bank has to keep certain proportion of its deposits in theform 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 willincrease by central bank


32/49

5. Changes in Reserve Capital

Commercial bank has to keep 5% of its deposit in the central bank

By changing reserve capital, central bank can control the supply ofmoney

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 limit

Commercial banks-will be careful in advancing loans


33/49

Qualitative Methods

1. 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


34/49

3.Direct ActionConcerned 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


35/49

SALMA BASHIR

Roll no # 126


36/49

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

before they occur

Interest Elasticity of Demand - measures how responsive demand is toa 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


37/49


38/49


39/49

FY08FY07 Target/ Proj H1 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 68.3Forex 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 Pakistans economy


40/49


41/49


42/49

NSIBA WARIS

Roll no # 139


43/49

Limitations of monetary policy

Organized capital market

Existence of eligible bills

Bank rate and other interest

rates

Willingness of banks


44/49

Organized capital market The success of monetary policy

depend upon the availability of

organized capital market. If capitalmarket is not organized then

central bank has to face difficulties

in controlling credit and

implementing monetary policy.


45/49

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.


46/49

Bank rate and other interestrates The bank rate policy becomes

effective only when the bank rateinfluences the lending rates .The

relationship between these rates

does not exist where the money

market is not organized.


47/49

Willingness of banks

The open market operation will not

be successful if the commercialbanks are not really interested in it

so the banks are willing to absorb

securities.


48/49

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.

Suggestions


49/49

Documents

Banking Law Monetary Policy 1231598267812073 1