Monetary Policy

 





Monetary Policy Objectives
Monetary Policy and Exchange Rate Regime
Monetary Policy Instruments






 


  Monetary Policy Framework  
   Instruments of Monetary Policy

 

Monetary Policy Instruments (percent)
 
Current
w.e.f
 SBP Policy Rate (Target for overnight money market Repo Rate)
5.75
21-May-16
 SBP Reverse Repo Rate (Ceiling of corridor)
6.25
21-May-16
 SBP Repo Rate (Floor of corridor)
4.25
21-May-16
 
Reserve Requirements on Banks (Rupee Applicable TDLs)
Cash Reserve Requirement (CRR) on TDL < 1 year
  Fortnightly average for Banks
5.0
12-Oct-12
  Daily minimum for Banks
3.0
12-Oct-12
  Weekly average for DFIs on total TDL
1.0
1-Jan-05
  Weekly average for DFIs
5.0
1-Jan-05
CRR on TL >= 1 year
0.0
4-Aug-07
SLR on TDL< 1 year
  Conventional scheduled banks
19.0
24-May-08
  Islamic banks and branches
19.0
3-Jun-11
  Weekly average for DFIs on total TDL
15.0
1-Jan-05
  Weekly average for DFIs
10.0
1-Jan-05
SLR on TL > 1 year    
  Conventional scheduled banks
0.0
18-Oct-08
  Islamic banks and branches
0.0
18-Oct-08
Reserve Requirements on DFIs (Rupee TDLs)
  Fortnightly average CRR on total TDLs
1.0
12-Oct-12
  SLR on total DTLs
15.0
1-Jan-05
Reserve Requirements on Foreign Currency Deposits
Cash Reserve Requirement (CRR)
  Conventional scheduled banks
5.0
07-Apr-01
  Islamic banks and branches
5.0
13-Nov-06
Special Cash Reserve Requirement (SCRR)
  Conventional scheduled banks
15.0
30-Jun-08
  Islamic banks and branches
6.0
13-Nov-06
Reserve Requirements on MFBs (Rupee Deposits/ TDLs)
CRR on TDLs < 1 year
5.0
28-May-10
SLR on TDLs < 1 year
10.0
28-May-10
DL: Demand Liabilities; TL: Time Liabilities; TDL: Time and Demand Liabilities
DFI: Development Financial Institutions


SBP is mainly using indirect instruments to implement its monetary policy. Changes in the policy stance are generally signaled through the SBP Policy (target) Rate. To ensure that the policy signals are transmitted to other key interest rates in the economy, such as banks’ lending and deposit rates, and financial markets continue to function smoothly, SBP is using several instruments
.

SBP Policy Rate: Through this policy rate SBP targets the overnight money market repo rate that signals the monetary policy stance. The ‘Policy Rate’ is set within the Interest Rate Corridor (IRC) bounded by SBP’s Standing facilities that is ‘Reverse Repo (Ceiling) and Repo (Floor) facility.

Standing Facilities:In order to reduce the volatility in short term interest rates and to bring more transparency in the implementation of monetary policy, State Bank of Pakistan introduced an interest rate corridor for the money market overnight repo rates. The corridor operates through standing overnight repo / reverse-repo facilities (i.e. floor & ceiling), setting a formal corridor for the money market overnight repo rates consistent with the monetary policy of State Bank of Pakistan. The interest rate corridor consists of two end-of-day Standing facilities offered by State Bank of Pakistan:

a) SBP Reverse Repo Facility:The eligible financial institutions can use SBP reverse repo facility, to obtain rupee funds for one day against approved securities. The financial institution sells the approved security to the SBP with the agreement to repurchase the same the day after. The interest rate charged against such lending, the SBP reverse repo rate, serves as ceiling for the money market overnight repo rate.

b) SBP Repo Facility:This facility allows the eligible financial institutions to place their excess funds with SBP for overnight and receive Treasury Bills in return. The interest rate paid to the banks under this facility is termed as SBP repo rate. It serves as a floor to the downward movement of money market overnight repo rate.

Open Market Operations:Open Market Operations (OMOs) are the most frequently used instruments for implementing monetary policy in Pakistan. OMOs are conducted to manage liquidity in the interbank money market; mainly with the objectives to ensure availability of sufficient funds for smooth settlement of interbank transactions and keeping the overnight interbank repo rate near the Policy (target) Rate.

OMOs are usually conducted as repo transactions to address banks’ temporary liquidity needs. These transactions involve central bank purchase (sale) of government securities to inject (absorb) liquidity in (from) the interbank market with an agreement to sale (purchase) the underlying security at a specified price at a designated future date. SBP conducts OMOs through ‘variable rate tenders’ whereby banks disclose both the amount of money they want to transact and the rate at which they want to enter into the transaction. The tenor of OMOs, set and announced by SBP each time OMO is conducted, ranges between overnight to two weeks, but are mostly of one week
.
 
SBP also uses outright OMOs when market liquidity is anticipated to remain short or in surplus over a longer period of time. The outright OMOs involve purchase or sale of government securities on permanent basis, i.e. until the maturity of the underlying security. Unlike the repo based OMOs, in outright OMOs ownership of underlying security changes between the financial institution and the SBP. Traditionally, SBP has been using outright OMOs to shift the government debt from its balance sheet to scheduled banks’ balance sheets
.

Reserve Requirements:Reserve requirement of banks is to hold liquid assets in the form of cash and, approved securities. SBP requires scheduled banks in Pakistan to maintain two types of reserve requirements, i.e. cash reserve requirement and statutory liquidity requirement.      

Cash reserve requirement (CRR):CRR is the proportion of banks’ applicable time and demand liabilities (TDLs) that they are required to hold in the form of cash with the SBP on fortnightly average basis (cash in vault of banks is not accounted for meeting the CRR requirement in Pakistan.); while maintaining a (lower) minimum reserve level with the central bank on daily basis. Required level of reserves for a bank in a reserve maintenance period are worked out on the basis of applicable TDLs of that bank at the end of the first day (i.e. Friday) of the maintenance period. Banks are not allowed to carry their excess of reserve position over the next maintenance period. Also, SBP does not remunerate deposits that banks keep with it for meeting the cash reserve requirement.


Details on CRR, currently applicable against different type of banks’ liabilities, are summarized in the Table.

Summary of Reserve Requirements
 
Definition
Applicable liabilities
Requirement
Cash Reserve Requirement
Domestic Currency Deposits Commercial banks are required to keep a portion of their rupee deposits with SBP as cash

Demand and time liabilities of less than 1-year tenor
Daily and fortnightly average
Foreign Currency
Deposits
Commercial banks are required to keep a portion of their foreign currency deposits with SBP as cash reserves (non-remunerated) and special cash reserves (remunerated).
All foreign currency deposits
Daily
Statutory Liquidity Requirement Commercial banks are required to keep a portion of their liquid assets in the form of cash, gold or approved government securities
Demand and time liabilities of less than 1-year tenor
Daily
* Approved government securities include T-bills, PIBs, Ijara Sukuk, etc.

Increase in CRR ratio reduces the funds available with the banks for lending to both the public and the private sector as banks have to hold additional cash in the form of reserves with the SBP for the same amount of their liabilities. Thus, assuming all else equal, the increase in CRR reduces the money multiplier and money supply in the economy, and tends to increase the interest rates in the economy.

Statutory liquidity requirement (SLR): SLR is the proportion of bank’s liabilities that they are required to invest in approved securities and/or hold in the form of cash; including balances with SBP, balances with NBP, balances left in the vault of banks, banks’ investment in capital of Micro-Finance Banks (MFBs) and foreign banks’ deposits with SBP under section 13(3) of the Banking Companies Ordinance 1962. Like CRR, maintaining period for SLR is also fortnightly that starts from Friday and ends at Thursday of the subsequent week. Applicable Time and demand liabilities at the end of the Friday (i.e. the first day of the maintaining period) are taken into account for the determination of SLR to be maintained during the maintaining period (if Friday is a holiday then time and demand liabilities as of close of the preceding working day is taken into account for calculating the SLR.)

Increase in SLR ratio implies that banks are required to hold a larger share of their funds into liquid assets approved/notified by the Federal Government for this purpose. Changes in SLR may change the composition of banks’ assets.

Among all the available tools for monetary policy, both CRR and SLR are the least frequently used instruments by SBP. For history of changes in CRR and SLR ratios see Table

Foreign Exchange (Forex) Swaps:

Forex swap is another instrument that SBP may utilize for liquidity management in the interbank money market to supplement its open market operations . Forex swap involves SBP’s purchase or sale of foreign currency at a certain value date (normally spot) with a simultaneous agreement to reverse the transaction at an agreed rate on a specified date in the future. SBP may conduct both sell-buy and buy-sell swaps in the foreign exchange market with the objective to temporarily mop-up and inject rupee liquidity in the money market, respectively.

Foreign exchange swaps do not alter the net open position of transacting parties.



  •  
    SBP Policy Rate
    5.75% p.a.
     
    SBP Overnight
    Reverse
    Repo (Ceiling) Rate
    6.25% p.a.
     
    SBP Overnight
    Repo (Floor) Rate
    4.25% p.a.
  •  
    Overnight Weighted Average Repo Rate
    As on 21-Sep-17
    5.92 % p.a.
     
    KIBOR
    As on 22-Sep-17
    Tenor BID OFFER
    3-M 5.90 6.15
    6-M 5.92 6.17
    12-M 5.97 6.47

  •  
    MTBs
    Tenor Rates
    3-M 5.9910%
    6-M 6.0109%
    12-M 6.0386%
    PIBs
    Tenor Rates
    3-Y Bids rejected
    5-Y Bids rejected
    10-Y Bids rejected
    20-Y Bid not received


    GIS

    Cut-off Margin over Benchmark*:
    -50 bps
    * Latest 6-M W.A MTB Rate


  • MTB Auction

    27-Sep-17

     
    PIB Auction

    18-Oct-17

     
    As on 15-Sep-17
    SBP’s Reserves
    14,283.6
    Bank’s Reserves
    5,816.1
    Total Reserves
    20,099.7

  •  
    USD/PKR Rates
    As on 22-Sep-17
     
    M2M
    Revaluation Rate
    105.4180
     
    Weighted
    Average Rate
    Bid: 105.3195
    Offer: 105.5045
       
       
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