The monetary policy decision-making primarily involves setting the policy interest rate, i.e. SBP Policy (target) Rate. The SBP’s Monetary Policy Committee reviews the monetary policy stance after every alternative month: July, September, November, January, March, and May of a fiscal year.
For each policy meeting of the Monetary Policy Committee, the Bank’s staff from the Monetary Policy Department (MPD) prepares a detailed account of evolving developments in the domestic economy, financial markets, and state of global economic and financial markets, which is shared with the Monetary Policy Committee in the form of Macroeconomic Trends and Developments. In addition, the MPD staff prepares forecasts of key macroeconomic variables such as inflation, exports, imports, exchange rate, money demand, etc. These forecasts are combined into a financial programming based macroeconomic framework for preparing consistent projections of key macroeconomic indicators of the country for current and the next fiscal year. The objective of these forecasts and projections is to support and enhance the forward looking aspect of monetary policy formulation. These forecasts and Macroeconomic Trends and Developments provide background information for the discussions on monetary policy among the senior management of the Bank.
Additionally, the Research Department staff also prepares the model-based projections using an indigenously customized version of the Forecasting and Policy Analysis System (FPAS). FPAS is a reduced-form New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with nominal rigidities. DSGE models are small to medium size economic models that combine the major sectors of the economy into a coherent and interrelated system as a whole satisfying the conditions for general equilibrium. The FPAS model is aimed at appraising the Monetary Policy Committee with the short to medium-term forecast of major economic indicators - such as headline inflation, output gap, real interest rate gap, real bilateral exchange rate gap, etc. - based on the specified interest rate path along with some alternative policy scenarios by incorporating the latest information. Based on its structure, the FPAS model also identifies relevant disturbances that drive these forecasts. Normally, these projections and scenario analysis are presented with some other independent evidence, not directly captured in the FPAS model, such as inflation expectations and consumer confidence surveys of the economy.
In the Monetary Policy Committee meeting, SBP staff presents Bank’s views on the evolving macroeconomic conditions along with projections and scenario analysis from the FPAS model to facilitate the members of Monetary Policy Committee in building their opinion on the monetary policy decision. After detailed discussion, the monetary policy stance is decided by the Monetary Policy Committee through simple voting procedure.