Inflation targeting-lite: strategic transition or operational stopgap?

In August 2009, the State Bank of Pakistan (SBP) officially changed its monetary policy framework from targeting monetary aggregates to an interest rate-based monetary policy framework, known as the inflation-targeting-lite regime, by introducing the interest rate corridor (IRC). Within international systems, the adoption of IRC would be a transitional move for implementing a flexible or full-fledged inflation targeting monetary policy framework, where the policy rate is used as a primary tool for anchoring inflation expectations (Stone, 2003). Indeed, most inflation-targeting central banks place corridor systems not only to stabilise overnight rates but also to anchor these rates around a policy rate, thereby strengthening monetary policy transmission and policy signalling. This has been quite contrary to the case of Pakistan, where a significant domestic literature and official SBP communication, such as working papers, research bulletin, and policy notes emphasise that the IRC was introduced as a means of reducing volatility in the weighted average overnight repo rate (repo), which has weakened policy signalling and disrupted money markets (Mahmood, 2016).