Monetary Policy

The actions of a central bank, currency board or other regulatory committee that determine
the size and rate of growth of the money supply, which in turn affects interest rates.
Monetary policy is maintained through actions such as increasing the interest rate, or
changing the amount of money banks need to keep in the vault (bank reserves).
Economic strategy chosen by a government in deciding expansion or contraction in
the country's money-supply. Applied usually through the central bank, a monetary policy
employs three major tools:
(1) Buying or selling national debt,
(2) Changing credit restrictions, and
(3) Changing the interest rates by changing reserve requirements.
Monetary policy plays the dominant role in control of the aggregate-demand and,
by extension, of inflation in an economy. Also called monetary regime
The experience of the State Bank of Pakistan (SBP) in conducting the monetary policy of
the country over the years comprises a whole range of regimes. While the overall objectives
of monetary policy have remained the same, policy contents intermediate targets, choice
of instruments and controls etc. have varied considerably over the years.

Monetary Policy 1972-88

Monetary policy during this period was characterized by:
(1) Creation of National Credit Consultative Council (NCCC) and Annual Credit Plan, 1972
(2) Regimes of credit ceilings with effect from October 1973
3) Directed, concessionary and mandatory credit targets
4) Targets for fixed investment and exports
(5) Control on bank deposits and lending rates

The table below shows economic growth, monetary expansion and

changes in prices, during 1972-88.
Table-4: Inflationary Gap 1972-1988

(in percentage) End

June

Consumer Monetary
GDP
Price
Growth
Growth
Index
(fc)
(CPI)
(a)
(b)
(c)

Inflationar
y Gap
(b-c)

1972

4.7

3.6

2.1

1.5

1973

9.7

22.7

6.7

16.0

1974

30.0

13.3

7.0

6.3

1975

26.7

7.8

3.3

4.5

1976

11.7

25.9

3.4

22.5

1977

11.8

24.3

2.8

21.5

1978

7.8

23.0

7.8

15.2

1979

6.6

23.5

5.6

17.9

1980

10.7

17.6

6.9

10.7

1981

12.4

13.2

6.2

7.0

1982

11.1

11.4

7.6

3.8

1983

4.7

25.3

6.8

18.5

1984

7.3

11.8

4.0

7.8

1985

5.7

12.6

8.7

3.9

1986

4.4

14.8

6.4

8.4

1987

3.6

13.7

5.8

7.9

1988

6.3

12.3

6.4

5.9

10.3

16.3

5.7

10.6

Average