Pakistani Chad: Pakistan's Monetary Policy

Pakistan's Fiscal and Monetary Policy

"Public, businesses and market needs to develop understanding that monetary

policy does indeed, over the long run, determine the behavior of the price level.

While inflation is precipitated by supply shocks, hoarding, official restrictions, import

prices, and so on, but these influence

monetary policy that can prevent an effect on the rate of inflation over a more

extended period. That is, following the initial price level shock, an appropriate

adjustment of the interest rate (if necessary) can stop a potential

repercussions on wages and prices.

Specialists use measures of core inflation, which exclude volatile prices, as a

way to see through one-off shocks. Core inflation is very useful to the central bank

itself, as a guide to the appropriate setting of its monetary policy stance.

Unexpectedly low (high) core inflation usually indicates the need for easing

(tightening) in the policy stance.

The ultimate objective of a central bank, and the measure of success of its

policy, is in terms of overall (i.e. headline) inflation. In this context, the way to deal

with price level shocks is to stress their

rate. This involves: ensuring that the effect on inflation

or may not require a policy action, and realizing that as monetary policy influences

the trend of prices with a lag of at least a year and a half, headline inflation should

return to its pre-shock rate not within not 1 year but 2 years.

Price signals in a market economy operate less effectively when the price

level is unstable; in addition, resources are diverted to unproductive speculation and

hedging. Thus, countries with unstable price levels—high inflation or deflation—

almost always experience weak output and growth. Thus, low inflation is not merely

an end in itself, but also a means to good overall economic performance.

The main cause of high interest rates is high inflation, through the expectedinflation

premium. Conversely, the best prospect for low interest rates is a stable

environment of low inflation. In this context, the relatively high interest rates that may

be necessary to achieve a desired disinflation represent “short-term pain for longterm

gain.” SBP, therefore, has a current focus on anti-inflation policy which will

Pakistani Chad