Qudsia Bano

Recent data has indicated a deceleration in the growth of broad money (M2), which dropped to 15.2% year-on-year as of May 24, 2024, from 17.1% at the end of March 2024. This slowdown is attributed primarily to a reduction in the growth of net domestic assets in the banking system, while the contribution of net foreign assets to M2 growth remained positive, reports WealthPK. The decrease in currency circulation and reliance on deposits for M2 growth are key factors in this development. Consequently, the reserve money growth has significantly declined from 10.0% to 4.3% during this period. The Monetary Policy Committee (MPC) has noted that these trends in monetary aggregates align with the ongoing tight monetary policy stance, which aims to curb inflation. “The current monetary policy measures are taking effect, as evidenced by the slowdown in broad money growth.

This is a positive sign for controlling inflation,” said Nosheen Ahmed, Operations Manager at the MCB Bank. She said from liability perspective, deposits continue to play a crucial role in M2 growth, while the growth rate of currency in circulation has decelerated. This shift indicates a cautious approach by both consumers and businesses in terms of cash usage. They prefer to keep funds in the banking system. The deceleration in the currency circulation growth suggests that the people are holding onto their money rather than spending it, which can be a response to tighter monetary policies and inflation concerns. Experts believe that effective implementation of monetary tightening policies is beginning to yield results, potentially improving the inflation outlook. “The reduction in reserve money growth from 10% to 4.3% is a clear indication that the central bank's policies are effective.

This should help stabilize prices and manage inflation expectations,” said Syeda Atifa, financial analyst at SNL Financials. “However, while the current policy stance shows promise, some experts caution against complacency. While the deceleration in M2 growth is encouraging, the broader economic environment remains challenging. Continued vigilance and adaptability in monetary policy are essential to ensure sustained progress,” warned Atifa. The positive impact on inflation is a critical aspect of these developments. By controlling the money supply, the central bank is taking necessary steps to prevent inflation from spiraling out of control. This is crucial for maintaining economic stability.

Credit: INP-WealthPk