Islamabad, Governor, State Bank of Pakistan Yaseen Anwar Thursday called on regional central bankers to fully understand nature of their economies and go beyond text book approaches to tackle today’s economic problems.
Inaugurating three-day SAARC Finance Regional Seminar on Monetary Policy Frameworks in SAARC Region at National Institute of Banking & Finance NIBAF, Islamabad, he asked them to check validity of basic assumptions while developing models for economic forecasts in view of possibility of breakdown in relations between key variables in backdrop of emerging economic realities. “We also need to keep close watch on pulse of economy, considering it is a living and ever evolving organism.”
He said comprehensive understanding of economy is necessary to correctly calibrate monetary policy, which may then achieve object of price stability, economic growth. Targets set by central banks have effect on real economy and implications for price stability. Central banks’ policies are more effective when they are independent of fiscal influence, have market freedom and are time-consistent. “We must occasionally toss conventional prescriptions aside and seek customized solutions,” he added.
Anwar said real interest rate channel in Pakistan is found to be “extremely weak during times of frequent price changes and high inflation.” Quoting recent study of SBP’s Research Department, he said prices are revised roughly every quarter. “Coupled with fact that Pakistan’s economy has experienced double-digit inflation in last four years, prices are very quick to adjust to changes in monetary policy. A large part of inflation persistence is due to sustained period of high inflation, which has allowed inflationary expectations to incubate.”
He said lending channel appears to be quite robust and is key channel through which monetary policy is transmitted to real economy in Pakistan. Role of exchange rate channel also gained importance over time due to liberalization of foreign exchange market. SBP monitors forex market very closely while considering impact of changes in exchange rate. He observed monetary policy may also influence inflation through expectations channel.
“We should concede that there are some things we have absolutely no control over in short-run. Policy making has become a difficult task in recent times. Complexity and uniqueness of our economy only emphasize need to develop thorough grass-root understanding and customized toolbox to deal with multiple challenges along the way. We moved to better understanding of economy and made some significant progress to discover impact our monetary policy has on real economy,” SBP Governor said.