Monetary Policy
ASSINGMENT
Submitted to Sir. Ovais Farooqui
Course Finicial Management
1. IMPACT OF MONETARY POLICY IN PAKISTAN ON CURRENT ECONOMIC SCENARIO
The economy seems to have settled at an unenviable equilibrium of high inflation and low growth. The protracted energy crisis and weak fiscal fundamentals are the main reasons behind this outcome. The pace of increase in domestic debt is also considerable and uncertain global economic conditions do not inspire much confidence either. In this constrained environment the impact of monetary policy has become limited; whether it is in terms of direct effects of interest rate changes or broad influence on expectations in the economy.
The average CPI inflation for FY12, 11 percent, was well within the target of 12 percent for the year and on the lower side of SBP’s earlier projections. The main reason for this moderation in inflation is a collapse in real private investment, indicating a structurally weak economy.
More recently, the year-on-year inflation has declined to 9.6 percent in July 2012 from 12.3 percent in May 2012. An unanticipated fall in international oil prices in May and June and a huge reduction of 50 percent in the administered prices of gas in early July 2012 are mainly responsible for this deceleration.
The effects of the latter may also only have transitory effects for a few months. Nevertheless, the decline in inflation in July 2012 has created strong market expectations for a downward revision in SBP’s policy rate. There has been a noticeable reduction in yields on the government securities in secondary market and KIBOR.
In any case, it would be too early to call it an emerging trend as there are still deep-rooted factors driving inflation. Stickiness in both the core inflation measures points towards the persistence of inflation in low double digits. SBP projects average CPI inflation for FY13 to remain in the range of 10 to 11 percent, which is higher than the announced
Submitted to Sir. Ovais Farooqui
Course Finicial Management
1. IMPACT OF MONETARY POLICY IN PAKISTAN ON CURRENT ECONOMIC SCENARIO
The economy seems to have settled at an unenviable equilibrium of high inflation and low growth. The protracted energy crisis and weak fiscal fundamentals are the main reasons behind this outcome. The pace of increase in domestic debt is also considerable and uncertain global economic conditions do not inspire much confidence either. In this constrained environment the impact of monetary policy has become limited; whether it is in terms of direct effects of interest rate changes or broad influence on expectations in the economy.
The average CPI inflation for FY12, 11 percent, was well within the target of 12 percent for the year and on the lower side of SBP’s earlier projections. The main reason for this moderation in inflation is a collapse in real private investment, indicating a structurally weak economy.
More recently, the year-on-year inflation has declined to 9.6 percent in July 2012 from 12.3 percent in May 2012. An unanticipated fall in international oil prices in May and June and a huge reduction of 50 percent in the administered prices of gas in early July 2012 are mainly responsible for this deceleration.
The effects of the latter may also only have transitory effects for a few months. Nevertheless, the decline in inflation in July 2012 has created strong market expectations for a downward revision in SBP’s policy rate. There has been a noticeable reduction in yields on the government securities in secondary market and KIBOR.
In any case, it would be too early to call it an emerging trend as there are still deep-rooted factors driving inflation. Stickiness in both the core inflation measures points towards the persistence of inflation in low double digits. SBP projects average CPI inflation for FY13 to remain in the range of 10 to 11 percent, which is higher than the announced