Performance of monetary Performance of monetary policy policy

ASSIGNED BY

SIR KHURRAM ZAFAR

PRESENTED BY

FARYAL JABEEN FARYAL JABEEN

HISTORY HISTORY

State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan State Bank of Pakistan The State Bank of The State Bank of Pakistan (SBP) is the central bank of Pakistan. remained basically Pakistan (SBP) is the central bank of Pakistan. remained basically unchanged until January 1, 1974unchanged until January 1, 1974,,

When the bank was nationalized, the scope of its functions was When the bank was nationalized, the scope of its functions was considerably enlarged.considerably enlarged.

The headquarters are located in the financial capital of Pakistan, The headquarters are located in the financial capital of Pakistan, Karachi with its second headquarters in the capital, Islamabad Karachi with its second headquarters in the capital, Islamabad

MONETARY POLICYMONETARY POLICY

Monetary policy rests on the relationship between the rates of Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be interest in an economy, that is the price at which money can be

borrowed, and the total supply of moneyborrowed, and the total supply of money

TOOLS OF MONETARY POLICY TOOLS OF MONETARY POLICY

Monetary policy uses a variety of tools to control one or both of Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest ratemoney supply and thus influence the interest rate

the supply of moneythe supply of money availability of money, availability of money, cost of money or rate of interest to attain a set of objectives cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. oriented towards the growth and stability of the economy.

THE STATE BANK REGULATES THE STATE BANK REGULATES

The state bank also regulates the volume and the direction of flow of The state bank also regulates the volume and the direction of flow of credit to different uses and sectors, the state bank makes use of both credit to different uses and sectors, the state bank makes use of both direct and indirect instruments of monetary management. During the direct and indirect instruments of monetary management. During the 1980s, Pakistan embarked upon a program of financial sector reforms, 1980s, Pakistan embarked upon a program of financial sector reforms, which lead to a number of fundamental changes which lead to a number of fundamental changes

OBJECTIVES OF MONETARY POLICYOBJECTIVES OF MONETARY POLICY

Price stabilityPrice stabilityCredit availabilityCredit availabilityStability of exchange rate Stability of exchange rate Full employmentFull employment High rate of economics growthHigh rate of economics growthDistribution of money Distribution of money

FINANCIAL SYSTEM AND SUPERVISIONFINANCIAL SYSTEM AND SUPERVISION

One of the fundamental responsibilities of the State Bank is regulation One of the fundamental responsibilities of the State Bank is regulation and supervision of the financial system to ensure its soundness and and supervision of the financial system to ensure its soundness and stability as well as to protect the interests of depositorsstability as well as to protect the interests of depositors

IN A OPEN MARKET IN A OPEN MARKET

A central bank can use open market operations to change the monetary A central bank can use open market operations to change the monetary base. The central bank would buy/sell bonds in exchange for hard base. The central bank would buy/sell bonds in exchange for hard currency. When the central bank disburses/collects this hard currency currency. When the central bank disburses/collects this hard currency payment, it alters the amount of currency in the economy, thus altering payment, it alters the amount of currency in the economy, thus altering the monetary base. The central bank can control the circulation of the monetary base. The central bank can control the circulation of money through the buying and selling of bondsmoney through the buying and selling of bonds

GROWTH AND MONETARYGROWTH AND MONETARY

Before 2005-2006 monetary policy was biased towards Before 2005-2006 monetary policy was biased towards supporting growth because inflation was at low level but supporting growth because inflation was at low level but with the rising inflation from 2005-2006 monetary actions with the rising inflation from 2005-2006 monetary actions are towards the containment of inflation (State Bank of are towards the containment of inflation (State Bank of Pakistan, 2006).High rates of inflation cause problems, not Pakistan, 2006).High rates of inflation cause problems, not just for some individuals, but for aggregate economic just for some individuals, but for aggregate economic performance. performance.

Monetary Policy PerformanceMonetary Policy Performance

The conduct of monetary policy by the Central Bank has been The conduct of monetary policy by the Central Bank has been designed to:designed to:

Influence the growth of money supply consistent with the required Influence the growth of money supply consistent with the required aggregate Gross Domestic Product (GDP) growth rate, ensure aggregate Gross Domestic Product (GDP) growth rate, ensure financial stability, maintain a stable and competitive exchange rate of financial stability, maintain a stable and competitive exchange rate of the naira, and achieve positive real interest ratesthe naira, and achieve positive real interest rates

INVESTMENT IN PRIVATE SECTORS INVESTMENT IN PRIVATE SECTORS

In addition, muted private sector investment expenditures are also In addition, muted private sector investment expenditures are also having a dampening effect on aggregate demand and thus inflation. having a dampening effect on aggregate demand and thus inflation. Even inflation expectations seem to have moderated, having a broad-Even inflation expectations seem to have moderated, having a broad-based effect on both food and non-food inflation. This is because a based effect on both food and non-food inflation. This is because a major factor in expectation formation is the recent experience of major factor in expectation formation is the recent experience of inflation. inflation.

CASE CASE

ANALYSIS ANALYSIS

Monetary policy operates by Monetary policy operates by influencing the pricing of money i.e. influencing the pricing of money i.e. ,the cost of borrowing and the ,the cost of borrowing and the income from saving the reserve income from saving the reserve sets the bank rate this is an interest sets the bank rate this is an interest rate for the reserve bank’s own  rate for the reserve bank’s own 

It will influence interest rate change overdraft and It will influence interest rate change overdraft and mortgage as well as for saving account. A change mortgage as well as for saving account. A change in Bank rate will also and share  in Bank rate will also and share 

Most Bank would try to compensate for the loss of Most Bank would try to compensate for the loss of income, by adjustment in deposit rate to neutralize income, by adjustment in deposit rate to neutralize the impact on their net interest income they would the impact on their net interest income they would reduce the cost of fond and also bring down the reduce the cost of fond and also bring down the interest rateinterest rate