Amidst mounting pressures and criticisms from various sectors, the Bangladesh Bank has finally taken steps to tighten monetary policy to address the inflationary pressures that have made it increasingly difficult for people to meet their daily expenses.
The Bangladesh Bank has decided to increase the margin of the lending rate for banks by 50 basis points, raising it from 3 per cent to 3.50 per cent. This adjustment will result in higher lending rates for banks.
In this regard, the central bank issued a circular on Thursday, outlining its intention to curb inflation in the coming months.
Mezbaul Haque, executive director and spokesperson of the central bank, said on Thursday, "Bangladesh Bank has decided to increase the lending rate corridor to make borrowing more expensive and curb inflation. We have set a target to bring inflation rates below 8 per cent by December."
Under the new directive, banks can now add 3.50 per cent, while non-bank financial institutions (NBFIs) can add 5.50 per cent to the reference lending rate, also known as the SMART rate, which currently stands at 7.20 per cent.
This adjustment translates to a bank loan interest rate of 10.7 per cent and an NBFI rate of 12.7 per cent.
This decision comes after the introduction of the SMART rate by Bangladesh Bank in its Monetary Policy for the July-December period of this year. The policy allowed banks to add a maximum of 3 per cent, while NBFIs could add a maximum of 5 per cent to the SMART rate. The SMART rate stood at 7.10 per cent in July but increased by 10 basis points in the following two months.
The central bank's decision to raise interest rates follows its increase in the policy rate on Wednesday, raising it by 75 basis points from 6.50 per cent to 7.25 per cent. This decision was made to combat persistent inflation in the country.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, commenting on the move told The Business Post, "This is just the beginning; the central bank should regularly review the policy rate. I believe Bangladesh Bank may consider raising the policy rate several more times. If the central bank deems it necessary, it should continue to adjust the policy rate."
Insiders suggest that Bangladesh Bank is attempting to control lending rates through the SMART mechanism.
The International Monetary Fund (IMF) has also advised the central bank that Bangladesh has struggled to control inflation due to issues with exchange rates and the effectiveness of monetary policy on the economy.
The increase in the lending rate, coupled with the rise in the policy rate, is expected to make loans more expensive, potentially reducing loan demand.
In August, private sector credit growth in Bangladesh dropped to 9.75 per cent, the lowest in 22 months, as businesses and individuals curtailed borrowing amid economic challenges and uncertainty surrounding the upcoming national elections.
This represents the lowest credit growth rate since October 2021 when it stood at 9.44 per cent.
