Monetary policy in pakistan. How monetary policy works Monetary policy tools Target rates Central bank policy State Bank Of Pakistan Inflation rate Interest rate Economic growth balance policy

1. Macro-economics
PRESENTATION
Presented to: Madam Aneeqa Faraz
Presented by: Yumna, Nimra, Sana,
Aqsa, Maheen.
Department: BBA-III

3. MONETARY POLICY
Monetary policy, the demand side of economic policy, refers to the actions undertaken by a
nation's central bank to control money supply and achieve macroeconomic goals that
promote sustainable economic growth.
Monetary policy involves changing the interest rate and
influencing the money supply.
• Inflation is a situation of rising prices in the economy. A more exact
definition of inflation is a sustained increase in the general price level
in an economy. Inflation means an increase in the cost of living as the
price of goods and services rise.

5. • An expansionary monetary policy is generally undertaken by a central
bank or a similar regulatory authority.

6. • How monetary policy works :
• The Central Bank may have an inflation target of 2%. If they feel inflation is going
to go above the inflation target, due to economic growth being too quick, then
they will increase interest rates.
• Higher interest rates increase borrowing costs and reduce consumer
spending and investment, leading to lower aggregate demand
and lower inflation.
• If the economy went into recession, the Central
Bank would cut interest rates.

7. • Changes in the policy rate impact demand in the economy through several channels and
with a lag. In the first place, changes in policy rate influence the interest rates
determined in the inter-bank market at which financial institutions lend or borrow from
each other. The market interest rates are also influenced by central bank interventions in
money and foreign exchange markets as well as by its communication.
• The changes in market interest rates influence the borrowing cost for consumers and
businesses as well as the return on deposits for the savers. Generally, lower interest rates
encourage people to save less and consume/invest more, and vice versa. Changes in the
policy rate also influence the value of financial and real assets, impacting people’s
wealth and thus their spending. The adjustment in demand finally affects the general
price level and thus inflation in the economy.

8. • Inflation and economic growth targets in Pakistan are set by the government and the
State Bank of Pakistan (SBP) is responsible for formulating monetary policy to
implement these targets. Structural models are useful for constructing different monetary
policy scenarios and choosing appropriate policy actions
MONETARY POLICY IN PAKISTAN

9. • Monetary policy involves central banks’ use of instruments to influence interest
rates and/or money supply in the economy with the objective to keep overall
prices and financial markets stable. Monetary policy is essentially a stabilization
or demand management policy that cannot impact long-term growth potential of
an economy.
• Preamble to SBP Act, 1956 envisages monetary policy to secure monetary
stability and attain fuller utilization of economy’s productive resources. In SBP’s
view, the best way to achieve these objectives on a sustainable basis is to keep
inflation low and stable.

10. • Low and stable inflation provides favorable conditions for sustainable growth and
employment generation over time. It reduces uncertainties about future prices of
goods and services and helps households and businesses to make economically
important decisions such as consumption, savings and investments with more
confidence. This, in turn, facilitates higher growth and creates employment
opportunities over the medium term leading to overall economic well-being in the
country.
• In practice, SBP’s monetary policy attempt to strike a balance among multiple and often
competing considerations. These include: controlling inflation, ensuring payment system
and financial stability, preserving foreign exchange reserves, and supporting private
investment.

11. THANK YOU