incentivize farmers not to be distracted by other options. similarly on rice, efforts are underway to ensure adequate availability of domestic supplies without disrupting the private sector initiatives to export. proper availability of commercial financing for key products and curbs on hoarding through borrowings is being controlled through central bank measures. ( iii ) on its part the central bank has benefited from its continued pursuance of monetary tightening which had yielded visible results in may 2007 when core inflation fell much below the fy07 target of 6. 5 %. however this trend has been now disrupted by an unabated rise in government borrowings from the central bank which has magnified risks for inflation. some short term measures are being contemplated to lower these borrowings to ensure that the end year results show less sbp borrowings by federal government. the impact of the high borrowings has however permeated and penetrated in inflation and it will take stronger measures to unwind it and results will emerge with lag. ( iv ) on its part central bank has continued pursuance of a managed floating exchange rate regime. sbp has been quite transparent in its exchange rate management and has underscored the mechanics on how the exchange rate is determined. since the central bank does not target a specific level, the exchange rate is market determined reflecting the demand and supply dynamics. to avoid spikes and excessive volatility on a day to day basis, central bank has been supporting upto 100 % of oil payments between november 04 to the third quarter of 07 but has since only supported 80 % of the oil payments with 20 % being handled by private sector. beyond this, the interventions are minimal. in recent days, the central bank has enhanced its vigilance in markets given the broadening of band between inter - bank and kerb rate and this has been narrowed with improved liquidity in kerb markets and other measures. all market participants have been advised that speculators and others who violate market ethics will be dealt with appropriate actions. exchange rate of pakistan has enjoyed a high degree of stability as evident from the foreign inflows and will continue to do so. sbp will take strict measures to combat any excessive build up of speculative tendencies among banks and exchange companies as warranted. ( v ) reserve build up will be a continued priority of this new government and central bank. the reserve build up achieved during fy07 was a conscious decision to ensure that pakistan has adequate reserves to provide cushion for any eventual

policy regime change – as an ignition point – will expand aggregate demand through multiple channels. c. reasons of the bank ’ s expansion of the qqe given the aforementioned view, you could naturally understand why the bank expanded the qqe at the end of october last year ( chart 9 ). the consumption tax hike in april last year brought about substantial fluctuations in the economy, that is, a front - loaded increase in demand immediately before the hike and a subsequent decline after the hike. as somewhat weak demand, mainly for durable consumer goods like automobiles, was protracted, a substantial decline in crude oil prices also exerted downward pressure on prices ( chart 10 ). weakness in demand associated with the consumption tax hike already waned, and the decline in crude oil prices will likely, over time, have a favorable impact on japan ’ s economy and work to put upward pressure on prices. however, as developments in actual prices and inflation expectations will mutually feed back, if there is downward pressure on actual prices, even for a short term, we should take a risk into account that it will delay the conversion of the deflationary mindset. to preempt manifestation of such risk and to maintain the improving momentum of expectation formation, it was necessary to expand the qqe. that was the judgment the bank made at the end of last october. d. how to evaluate employment and wage developments as aggregate demand expands, ignited by a rise in inflation expectations, a virtuous cycle from production to income and spending operates, and thereafter, stable employment and an improvement in labor conditions would ensue. in that regard, as mentioned earlier, an improvement in the labor market conditions since last year, such as a sizable increase in the number of employees and a substantial improvement in the unemployment rate and the active job openings - to - applicants ratio, has not been interrupted even amid the seemingly lackluster real gdp growth due to the effects of the consumption tax hike ( chart 11 ). as for the increase in the number of employees, there is criticism noting that only non - regular employment was increasing in number while regular employment was not. however, that criticism seems to mix up a forward - looking development of “ gradually increasing employment starting from non - regular employment, ” which has been occurring as the pie of employment as a whole has been expanding, with a backward - looking development of “ replacing regular employment with non - regular employment, ” which had been seen in the past. it is natural that