The State Bank of Pakistan is scheduled to announce the Monetary Policy Statement (MPS) on Monday, 30th October 2023.
What is Monetary Policy?
Monetary policy is a set of tools used by a nation's central bank to control the overall money supply and promote economic growth. It employs strategies such as revising interest rates and changing bank reserve requirements. Simply put. monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied.
In Pakistan, monetary policy is enacted by The State Bank of Pakistan to sustain a stable economy and keep unemployment low, protect the value of the currency, and maintain economic growth.
By manipulating interest rates or reserve requirements, or through open market operations, a central bank affects borrowing, spending, and savings rates.
Tools of Monetary Policy:
Open Market Operations
Open market operation (OMO) is a term that refers to the purchase and sale of securities in the open market by the Central Bank. It conducts open market operations to regulate the supply of money. It purchases Treasury securities to increase the money supply and sells them to reduce it.
Reserve Requirements
Authorities can manipulate the reserve requirements, the funds that banks must retain as a proportion of the deposits made by their customers to ensure that they can meet their liabilities.
Lowering this reserve requirement releases more capital for the banks to offer loans or buy other assets. Increasing the requirement curtails bank lending and slows growth.
Bank Rates
A bank rate is the interest rate at which a nation's central bank, i.e. The State Bank of Pakistan, lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is a method by which the Central Bank affects economic activity. By changing the bank rates, Central Bank regulates the supply of money within the economy and as an automatic effect the banks will loan more or less freely depending on these interest rates.
The State Bank of Pakistan is scheduled to announce the Monetary Policy Statement (MPS) on Monday, 30th October 2023. There are three possible scenarios:
1· If the Central Bank wants to increase the supply of money, it will decrease these bank rates, so ultimately Commercial Banks will be able to provide more loans - thus increasing money supply
2· If the central bank wants to decrease the supply of money, it will increase these bank rates and as an effect Commercial Banks will not be able to provide more loans to the public - thus decreasing money supply
3· If the central bank wants to keep the current economic situation constant, it will neither increase nor decrease these interest rates. This is also sometimes done to wait & watch the situation, in order to better access what appropriate action is needed.
What is CFA & Who are the CFA Chart-holders?
CFA stands for Chartered Financial Analyst. The charter is a professional credential bestowed by the CFA Institute on financial and investment professionals who have completed its program of study, passed all three levels of its examinations, and met other professional requirements. A successful candidate is awarded the “CFA charter” and becomes a “CFA Charter-holder”.
The CFA Society has conducted a Monetary Policy Survey (MPS) in which several bankers, members of the corporate finance firms and agents from stock exchange etc. have participated and answered the questions asked in the survey. This is to predict the State Bank of Pakistan's policy that is to be announced on Monday, 30th October 2023.
The following are the three questions which were asked by the CFA Society.
(Above picture is a property of CFA Pakistan Society)
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