Pakistan ‘s monetary policy Presented by: Ambreen Jaseem Farooq Anjum
outline 1 2 3 4 5 Brief introduction Reserve requirement Interest rate Open market policy 4 Brief conclusion 5 www.themegallery.com
Brief introduction Definition: government actions to increase or decrease the money supply and change banking requirements and interest rates to influence banker’s willingness to make loans. www.themegallery.com
Brief introduction ↓ the supply of money Government, central bank, monetary authority ↓ the supply of money availability of money cost of money rate of interest Objective: the growth and stability of the economy www.themegallery.com
Contractionary policy: Decrease the total money supply, Brief introduction Expansionary policy: increase the total money supply, combat unemployment, lower interest rates Contractionary policy: Decrease the total money supply, Combat inflation, Raise interest rates www.themegallery.com
Tools of monetary policy Reserverequire-ment Interest rate Open market policy www.themegallery.com
(or Required Reserve Ratio) Reserve Requirement (or Required Reserve Ratio) www.themegallery.com
Definition The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. www.themegallery.com
Reserve Requirement Changes Affect the Money Stock Increasing the reserve requirement Reducing the volume of deposits Reducing the money stock and raises the cost of credit www.themegallery.com
Part 2: Effects: Reserve Requirement Changes Affect the Money Stock Decreasing the ratios Expansion of bank credit and deposit levels and a decline in interest rates www.themegallery.com
Pakistan has raised its reserve requirment ratio ten times in 2007. Situation in Pakistan Pakistan has raised its reserve requirment ratio ten times in 2007. 8.5% 9% 9.5% 10% 10.5% 11% 11.5% 12% 12.5% 13.5% 14.5% www.themegallery.com
Effects To maintain the stability of the value of the currency To control the currency flow, restrain inflation Effects To promote the economic growth. www.themegallery.com
The importance of interest rate in money policy 1.Interpreting the term structure 2.Interpreting the term structure www.themegallery.com
The influnce of changes of interest rate www.themegallery.com
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Pressure of foreign exchange Inflation Investment Consumption Pressure of foreign exchange www.themegallery.com
Discount rate and rediscount rate discount rate ：a kind of interest rate.when individuals or industries exchange the commercial paper （商业票据）for cash with the commercial bank before its due date, the bank will take off some interest from the amount of money the commercial paper represents and the individuals or industries get the rest of money. And the interest rate the bank uses is called the discount rate. -------something to do with time value of money www.themegallery.com
What’s the time value of money? 2007 2 bars of chocolate 10 yuan 2008 only 1 bar of chocolate 10 yuan As time goes by ,the value of money decreases.---- -the so called time value of money www.themegallery.com
How the discount rate influences the value of money? 10 yuan＝10*(1+10%)=11 yuan (2007) (2008) 9.1yuan＝9.1*(1+10%)=10yuan (2007 ) (2008) 10 yuan ＝10*(1+10%)(1+10%)=12.1 yuan (2007) (2009) In 2007,we can buy 2 bars of chocolate with 10 yuan , while in 2008, we have to pay 11 yuan for the same 2 bars of chocolate. the value of money actually decreases↓ www.themegallery.com
Rediscount rate Central bank Individuals or industries Commercial banks Central bank www.themegallery.com
rediscount rate today mainly refers to the interest rate the central bank charges commercial banks when they borrow money from the central bank. www.themegallery.com
The function of rediscount rate commercial banks’ interest rate on loan↑ individuals’ tendency to borrow money ↓ cash flow in society↓ investment of individuals and industries ↓ economy get controlled www.themegallery.com
some figures of China’s rediscount rate from 1993 to 2003. 10.8 1994 1995 10.44 1996 9 1997 8.55 1998 4.59 1999 3.24 2000 2001 2002 2.7 2003 www.themegallery.com
Open Market Operation www.themegallery.com
Outline Definition of open market operation Classification of open market operation Importance of open market operation Specific operations and Impact of open market operation—how is open market operation conducted China’s open market operation in 2008 www.themegallery.com
What is open market operation? Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other financial instruments. Monetary targets, such as interest rates or exchange rates, are used to guide this implementation. www.themegallery.com
Importance of open market operation controlling the money supply achieving and maintaining a fixed exchange rate with relation to some foreign currency guiding the trend of interest rates in the currency market www.themegallery.com
Central Bank Bill Central Bank Bill is short-term bond issued by The People’s Bank of China to retrieve the fundamental currency. The expiration of Central Bank Bill is characterized as handing the fundamental currency out. www.themegallery.com
Pakistan’s open market operation in 2008 The principal guidance is to control the inflation and 1.preventing money supply from increasing too rapidly 2.quickening the revaluation of foreign exchange rate 3.raising the interest rates www.themegallery.com
conclusion An independent and effective monetary policy is essential for effective economic management in Pakistan. www.themegallery.com
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