WEEK:11

Monetary Policy

Definition
Monetary Policy refers to the action taken by the country's central bank to manage money
supply and interest rate to achieve economic goals.

Tools Of Monetary Policy:

The tools of monetary Policy are the instruments that central banks use to influence the
economy by controlling the money supply and interest rates.

1.Open Market:

This is the most commonly used tool by central banks. It involves buying or selling government

securities in the open market to affect the money supply. When the central bank buys

government securities, it increases the money supply, and when it sells government securities,

it decreases the money supply.

2. Reserve Requirements:

Central banks also have the power to set reserve requirements, which are the amount of

money that banks must hold in reserve against deposits. By increasing or decreasing these

requirements, central banks can influence the amount of money that banks can lend out, thus

affecting the money supply.

3. Discount rate:

The discount rate is the interest rate at which banks can borrow money from the central bank.

By increasing or decreasing the discount rate, central banks can influence the cost of borrowing

for banks, which can, in turn, affect the money supply.

4. Forward guidance:

Forward guidance is a tool that central banks use to communicate their future monetary policy

decisions to the public. By providing guidance on future interest rate decisions, central banks

can influence current market expectations and affect economic activity.

State Bank Of Pakistan:

The State Bank of Pakistan is the central bank of Pakistan. It is responsible for regulating and

supervising the country's banking system, controlling the money supply, and formulating and

implementing monetary Policy.

Function of State Bank of Pakistan:

1.Monetary Policy:

The State Bank of Pakistan Formulates and implements monetary Policy to maintain price

stability and promote sustainable economic growth. It sets interest rates, manages the money

supply, and regulates the banking system.

2.Issuance of Currency Note:

State Bank of Pakistan is the sole authority for issuance of currency notes. All kinds of currency

notes are designed and printed under direct supervision and control of SBP.
3.Bankers Bank:

State Bank of Pakistan is a banker's bank. It is mandatory for all scheduled banks

to maintain with the state bank of Pakistan a minimum reserve in proportion of

their demands and time liabilities as on close of business on the last working of

the week.

4.Financial Stability:

The SBP monitors and assesses risks to the stability of the financial system. It takes measures to

safeguard the system from systematic risks and promotes financial stability through effective

risk management.