ACKNOWLEDGEMENT

First I would like to thank almighty because of giving me this opportunity to do work on Monetary policy for price stability and blessing all that I done during my work. I have also expressed our deepest appreciation to our honorable course Instructor Mohammed Farashuddin sir and our respondents giving who has been a source of encouragement and inspiration giving me with their good respond and advice towards completion of the assignment. We Are Ever Thankful To Our Suspected Teacher Of East West University From Whom We Have Been Learning Continuously. Thank you very much and may almighty bless you all.

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Index
Particulars Monetary policy Reasons of publishing Monetary Policy Statement Scope of monetary policy Objectives of monetary policy Monetary policy for price stability How monetary policy control price stability Limitation of monetary policy in developing country Conclusion Reference 03 04 Page No.

04 05 06 08 12 12 13

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Monetary policy:
Monetary policy is the deliberate control of base money supply or incertain instances, credit conditions with a view to achieving macroeconomics policy of objective such a price stability, GDP growth, Employment generation etc. its a process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's monetary policy are; 1. To regulate currency and reserves; 2. To manage the monetary and credit system; 3. To preserve the par value of domestic currency; 4. To promote and maintain a high level of production, employment and real income; 5. To foster growth and development of the country's productive resources in the best national interest. Although the long term focus of monetary policy in Bangladesh is on growth with stability, the short-term objectives are determined after a careful and realistic appraisal of the current economic situation of the country.

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Reasons of publishing Monetary Policy Statement

The objectives for which The Central Bank of Bangladesh adopts the half yearly MPS H2 FY11 are given below: To support the governments goal of faster inclusive economic growth and poverty reduction, besides maintaining monetary and price stability. To anchor inflation expectation of the markets is 7.5% in FY12 and the existing rate is 10.17%. At present condition authority are unable to decrease the price of consumer products so it is wise to make the price stable by setting the inflation rate at 7.5%. Achieving an inclusive economic growth by facilitating productive sectors while keeping inflationary pressure under control. By fixing inflationary rate the authority trying to increase the outcomes using the maximum infrastructure of the productive sectors which will contribute in the national income. Discouraging credit flows to unproductive sectors whereas increasing credit flow to productive sectors. As we all know by increasing dependence on domestic goods and decreasing dependence on imported goods one country can go up to our expectations. To keep domestic borrowing conditions easy in a recessionary global environment, the central bank has refrained from Reverse Repo operations since the last quarter of FY11 and has announced to continue it in the second half of the current fiscal year. It is set to strengthen its oversight on liquidity, capital adequacy and risk management in banks and financial institutions to protect the domestic financial sector from instabilities of the kind now afflicting markets in advanced economies.

Scope of monetary policy

Monetary decisions today take into account a wider range of factors, such as: Short term interest rates; Long term interest rates; Velocity of money through the economy; Exchange rates Credit quality Bonds and equities (corporate ownership and debt) Government versus private sector spending/savings International capital flows of money on large scales Financial derivatives such as options, swaps, futures contracts, etc.
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Objectives of monetary policy

The objectives of a monetary policy in Bangladesh aim at growth, stability and social justice. After the Keynesian revolution in economics, many people accepted significance of monetary policy in attaining following objectives. Price Stability Rapid Economic Growth Exchange Rate Stability Balance of Payments (BOP) Equilibrium Full Employment Neutrality of Money Equal Income Distribution These are the general objectives which every central bank of a nation tries to attain by employing certain tools (Instruments) of a monetary policy. Let us now see objectives of monetary policy in detail:-

Price Stability
The main objective of monetary policy is price stability. The monetary policy having an objective of price stability tries to keep the value of money stable. It helps in reducing the income and wealth inequalities.

Rapid Economic Growth

One of the most important objective of a monetary policy. The monetary policy can influence economic growth by controlling real interest rate and its resultant impact on the investment

Exchange Rate Stability

Exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the international community might lose confidence in our economy. The monetary policy aims at maintaining the relative stability in the exchange rate.

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Balance of Payments (BOP) Equilibrium

The Bangladesh Bank through its monetary policy tries to maintain equilibrium in the balance of payments The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. If the monetary policy succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.

Full Employment
Full Employment' stands for a situation in which everybody who wants jobs get jobs. However it does not mean that there is a Zero unemployment. In that senses the full employment is never full. Monetary policy can be used for achieving full employment. If the monetary policy is expansionary then credit supply can be encouraged. It could help in creating more jobs in different sector of the economy.

Neutrality of Money
The monetary policy should regulate the supply of money. The change in money supply creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money and neutralize the effect of money expansion.

Equal Income Distribution

Monetary policy can make special provisions for the neglect supply such as agriculture, small-scale industries, village industries, etc. and provide them with cheaper credit for longer term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary policy can help in reducing economic inequalities among different sections of society

Monetary policy for price stability:

Now Im going to describe the main objective of monetary policy that is Price Stability and how monetary policy control economic price stability-

Price stability:
Price stability meaning low and steady inflation. Price stability exists when prices overall are stable (ie, money is an effective store of value). This does not mean that prices are frozen, but rather that taken on the whole they are stable. In an environment of price stability, you would expect some prices to be rising but others to be falling
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What causes price stability, inflation and deflation?

The rate of inflation tends to increase when the overall demand for goods and services exceeds the economy's capacity to sustainably supply goods and services. Likewise, when productive capacity is greater than demand, the rate of inflation tends to decrease, and, if the excess capacity persists, deflation can occur. By "demand" we mean the desire for goods and services that is supported by the means to purchase those goods and services.By "the economy's capacity to sustainably supply those goods and services" we mean the level of production that can be sustained without shortages occurring. Thus, throughout the economy, if factories are working flat out to meet demand, inflationary pressure may emerge. Factory staff will work longer hours, which may require overtime payments, thereby forcing firms to put up their prices. Conversely, if factories are producing more goods than they can sell, then to get rid of the stock that is building up they may have to reduce their prices. If enough do this the rate of inflation will start to fall. both of are create trouble to maintain price stability . The inflation rate in Bangladesh and its purchasing power, as shown in Figure 1

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Fig-1: Inflation rate of Bangladesh (1980-2010)

How Monetary Policy control Price Stability:

Price stability is the main objective of monetary policy. Applying monetary policy government can control the price and can stable it to maintain a good and healthy economic environment all people. Some points are given below :

1. Inflation Possibility of Kickback?

Considerable policy interest of the central bank has been focused on anchoring inflation expectations, if not targeting it. Inflationary pressure in recent times started to ease with good bumper crop harvest and with falling import prices of fuel oil and other commodities. The average inflation (12 month moving average) came down to 7.3 per cent in May 2009 (see Figure 1), a comforting circumstance compared to the earlier projected level of 8.5 per cent for end of the fiscal year.
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Fig-2: Trends in movement of consumer price index(CPI) aggregate, food and non food (July 06 - May 09)

2. Kick Back from Monetary Expansion:

The recent monetary policy statement has expressed its apprehension about the possible downside risks emanating from possible commodity price hike. The monetary policy statement has also expressed keen interest to facilitate growth acceleration, particularly in view of its broader objective of poverty reduction and employment generation. A trade-off between price stability and growth acceleration often seizes the centre of attention in macroeconomic policy-making. While many have argued for an insignificant relationship between the two in long run; it is hard to ignore the inherent trade-off in the short run. Thus, while concentrating on growth, the central bank would need to keep a vigilant eye on the inflationary trend so that imported inflation and/or expansionary monetary policy (largely induced by government borrowing) do not weaken the price stability.

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3. Development of Monetary Policy Instrument: The most common instruments that are used to control price stability, money supply and credit in a market or mixed economy structure include Cash Reserve Ratio (CRR) and/or Statutory Liquidity Ratio (SLR), Bank Rate, directed credit, and administered interest rates, Repurchase (Repo) and Reverse Repo and outright transactions in government securities (Open Market Operations). There are more institutional instruments that a central bank can use to regulate the money market. Table informs about the major monetary policy instruments used by the Bangladesh Bank. Instrument Current rate (In%) CRR 5.0 SLR Bank rate Repo 18.0 5.0 8.5 Last rate changed Increased from 4.5 per cent in 2006 Increased from 16.0 per cent in 2006 Decreased from 6.0 per cent in 2004 Comment Given the current excess liquidity one may opt for using one of these tools. However this liquidity also provided the space for using moderate expansionary policy stance.

Decreased from 8.75 per cent March, 2009 Reverse 6.5 Decreased from 6.75 per repo cent March, 2009 Fig-3: status of monetary policy instrument Bangladesh Bank frequently changed CRR, SLR, and the Bank Rate along with other instruments before implementing the financial sector reforms during the early 1990's. Since the beginning of the 1990's, BB switched over to open market operations mainly through government treasury bills (Tbills) auctions. Considering present excess liquidity in the banking system, the central bank may opt for using one of these instruments (Table 1). However, excess liquidity in the banking system also gives flexibility to the government for increasing amount of borrowing from the banking system. In order to streamline liquidity management and effective control of money supply, the Bangladesh Bank introduced Repo and Reverses Repo instruments in 2003. Bangladesh Bank uses short term interest rates
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e.g., Repo and Reverse Repo rates as indirect instruments of monetary policy more frequently to inject liquidity or to mop up excess liquidity respectively from the market to smooth 4. Anchor(S) of the Monetary Policy: Intermediate objectives (anchors) are important for price stability. They provide guidelines to policy-makers at times when ultimate objective (inflation or growth or both) responds with a lag. It also reduces the uncertainty and ensures transparency in policy making. In this context, three most popular approaches in a monetary policy regime are the followingi. Exchange rate targeting ii. Monetary aggregate targeting iii. Inflation targeting In Bangladesh all of these approaches have been practiced for quite some time. While exchange rate targeting will be continued to keep the balance between the interests of the exporters and consumers, monetary aggregate targeting will be the intermediate objective to promote growth without dampening the macroeconomic stability in the present context

1. Open market operations

Open market operations are the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this Implementation. Bangladesh bank mainly injects or withdraws reserves from the banking system through open market operations (OMO).

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Limitation of Monetary Policy in Developing Country

In developing country, monetary policy suffers from the following limitations In under developing countries, and capital markets are narrow and unorganized. Similarly, in the situations, the instrument the reserve requirement does not function properly. By its nature, monetary policy is not effective in the short run. The role of monetary policy is not compulsive but permissive. This seriously limits the efficiency of monetary policy in backward countries. In under developed society where liquidity trap is in existence monetary policy cannot work efficiently. Administrative honesty and firmness are not very rigorous in less regular countries which reduce the efficiency of monetary policy a policy a lot. Lastly, the lag between the decision about a particular policy and its implementation also hinders the monetary policy in its success. Here we found that monetary policy suffers from various limitations in the developing country. So, it should be supplemented by fiscal policy to make it effective. Despite this information, monetary policy sets the tone of economic development in recent years.

Conclusion:
The Monetary Policy Statement (MPS) is intended to outline the objective and the modalities of formulation & conducting of monetary policy by the BB, its assessment of the recent and the expected monetary and price developments, and the stance of monetary policies that will be pursued over the near term. Objectives of the monetary policies of BB as outlined in the Bangladesh Bank Order, 1972 comprise attainting and maintaining price stability, high levels of production, employment and economic growth in such a directed regime with little or no Role of financial prices in influencing the magnitudes or directions of credit the present MPS provides the monetary policy stands that BB intends to follow during first half of FY11-12.The prime objective of the policy stance is to ensure the use of the financial instruments towards promoting real sector growth at its targeted level along with ensuring reasonable price stability. The policy stance takes into account recent developments in real, external, fiscal & monetary sectors of the economy and the near term macroeconomic outlook for the Remaining period of FY11.

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Reference:
2. 3. 4. 5.
6. 7. 8. 9.

www.bb.org.bd www.mof.gov.bd www.economywatch.com www.en.wikipedia.org

http://www.ecb.int/press/key/date/2006/html/sp060707.en.html http://www.rbnz.govt.nz/challenge/resources/2970552.html#whatispricestability http://www.indexmundi.com/bangladesh/inflation_rate_(consumer_prices).html http://www.cpd.org.bd/downloads/CPD_MPS.pdf

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