Karachi, November 26, 2023 – The State Bank of Pakistan (SBP) has declared its intention to implement a flexible inflation targeting regime. This decision, outlined in the recently released five-year plan, underscores the SBP’s commitment to prioritizing price stability as the primary objective of monetary policy.
The SBP’s comprehensive plan involves a multi-faceted approach, encompassing the enhancement of the efficacy of monetary policy through various means. The central bank aims to strengthen the transmission mechanism of monetary policy, bolster research and data management capabilities, and identify and address structural issues within Pakistan’s economy through collaboration with relevant stakeholders.
Under the SBP Vision 2028, the central bank has set ambitious goals, including the enhancement of analytical and forecasting capabilities to support effective decision-making. The plan emphasizes the provision of timely information and analysis on both topical and structural issues to aid the Monetary Policy Committee’s (MPC) deliberations and decision-making processes.
One of the key objectives is to improve the capacity for forecasting medium-term inflation, assessing interest rate paths, and utilizing monetary policy tools more effectively to achieve better inflation outcomes. In line with the evolving landscape, the SBP aims to augment models and analyses used in monetary policy formulation to account for emerging risks and opportunities related to climate change, digitalization, technological advancements, and financial inclusion.
The central bank also seeks to enhance public awareness about monetary policy to anchor inflation expectations through improved communication strategies. This includes establishing and deepening engagement with key stakeholders through various forums, including social media platforms. Furthermore, the SBP aims to improve the public’s understanding of crucial macroeconomic concepts, particularly those related to monetary policy.
In a groundbreaking move, the SBP is adopting an inflation targeting regime that emphasizes flexibility to balance long-term price stability and economic growth. The central bank is actively engaging in research to arrive at a shared definition of price stability with the government, thereby ensuring a cohesive and collaborative approach to monetary policy.
To support this initiative, the SBP is placing a strong emphasis on modernizing data collection, compilation, and dissemination using innovative tools and technologies. By adopting modern techniques, the central bank aims to facilitate research and policy decisions, instituting a common national user-friendly database and fostering understanding and discussion on economic issues.
In terms of the implementation mechanism, the SBP is committed to improving efficiency by introducing new products, including Shariah-compliant monetary and liquidity management tools. Additionally, there is a focus on the modernization of existing tools to enhance the effectiveness of monetary policy. The central bank aims to foster the development of financial markets by strengthening and facilitating a market-based exchange rate regime, deepening and diversifying money and government debt markets, and establishing a vibrant market mechanism.
Furthermore, the SBP is gearing up to improve financial market infrastructure and introduce new products to enhance risk management. In tandem with these efforts, the central bank will actively facilitate macroeconomic reforms through in-depth analysis and research on structural issues. The SBP plans to collaborate with stakeholders to design economic reforms and closely monitor their implementation, with a particular focus on incentivizing private sector inflows, especially foreign investment, to ensure a resilient and sustainable external balance of payments.
The announcement marks a significant step towards a more dynamic and responsive monetary policy framework, signaling the SBP’s commitment to proactively address economic challenges and foster sustainable growth in Pakistan.
