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8/2/2019 Banking Law Monetary Policy 1231598267812073 1
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MONETARY POLICYRegulated authority
STATE BANK OF PAKISTAN
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SAMEERA DAR
Roll no # 1542
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Facts and Figures
Central Bank of: Pakistan
Established: 1947
Headquarters: Karachi
Governor: Shamshad Akhter
Official website: www.sbp.org.pk
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Monetary Policy
It is a policy of central bank to
control the supply of moneywith the aim of achieving
macro economics stability.
(Harry Johnson)
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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
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Full Employment
Increase in the production
Increase in the investment
Economic development
Stability of Capital Market
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Proper Distribution of Wealth
Exchange Rate Stability
To increase Exports
Improvement in standard ofliving
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Price Stability As Basic
Objective
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Improving thetransparency of the price
mechanism,
Reducing inflation risk
premier in interest rates.
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Preventing anarbitrary
redistribution ofwealth and income as aresult of unexpected
inflation or deflation.
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BENEFITS OF
MONITRY POLICY
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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.html8/2/2019 Banking Law Monetary Policy 1231598267812073 1
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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.
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DIFFERENCE BETWEEN THE VARIOUES TYPESOF MONETARY
POLICY
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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.
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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.
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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.
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SABA KHURSHEED
Roll no # 1541
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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
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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.
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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.
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SANA KHALID
Roll No.127
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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
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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
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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
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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
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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
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SALMA BASHIR
Roll no # 126
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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
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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
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NSIBA WARIS
Roll no # 139
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Limitations of monetary policy
Organized capital market
Existence of eligible bills
Bank rate and other interest
rates
Willingness of banks
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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.
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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.
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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.
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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.
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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
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