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Introduction
Today, the Reserve Bank uses monetary policy to control inflation and keep it
within a specific target band. Monetary policy is encountered in several ways.
Bangladesh directly encountered the main instrument of monetary policy, the
Official Cash Rate (OCR), when they borrow money at retail interest rates through
mortgages, credit cards or personal loans, or when they save money in bank
accounts that earn interest. Retail rates of interest are directly related to the OCR
set by the Reserve Bank. Monetary policy helps prevent large swings in economic
growth and employment. Monetary policy is the management of monetary supply
and interest rates by central bank to influence prices and employment. Monetary
policy works through expansion and contraction of investment and consumption
expenditure. Monetary policy refers the central bank’s policy to control of the
availability, cost and use of money and credit with the help of monetary measures
in order to achieve the specific goals.
Objectives of monetary policy in developing countries:
There are some monetary policies in developing countries they are:
1. Price stability
2. Exchange stability
3. Full employment
In under develop countries like Bangladesh the full employment objective is more
crucial, because such economies have both un-employment and under-employment
open and disguised. In less develop countries though full employment can not be
achieved within a short period, the monetary policy should try to achieve at least a
near full employment situation.
4. Economic growth
5. Neutrality of money
1. Quantitative instruments
These instruments influence the credit creating capacity of the commercial banks
by affecting directly or indirectly the excess of the banks. Different forms of
quantitative instrument are:
✔ Variable reserve ratio
✔ Bank rate
It is the rate at which central bank lends money to the commercial banks.
If bank rate is increased it will increases the cost of borrowing of
commercial banks, which in turn reduces the capacity of credit creation
of the commercial banks. In the opposite way, a reduction in bank rate
will increase the amount of credit created by commercial banks.
Open market purchase of securities by the central bank will give more
power and money in the hands of commercial banks to expand credit
creation. The opposite will happen if there are sales of securities by the
central bank.
Bank rate means the rate at which central bank gives credit to the
commercial bank. If this rate increases the commercial bank, also increase
their interest rate. Thus, credit from banks decrease and inflation can be
checked.
By this system Pakistani bank sells securities and can reduce the cash in
hand of the people.
The fiscal measure and the others are not the direct function of Pakistani bank. But
Bangladesh bank acts as a financial advisor of the government to adopt some fiscal
measures.
1. Fiscal measure
1. Direct measures
✔ Price control
✔ Rationing
1. Other measures
✔ Increase in production
✔ Increase in import
✔ Decrease in export
✔ Wage control