Bangladesh Bank (BB) has again increased the policy rate or repo rate by 50 basis points to 7.75 per cent to tame the ongoing high inflationary pressure, which hit 9.94 per cent in October.
In line with the move, the central bank has also increased the interest on retail loans.
The margin of SMART (Six months Moving Average Rate of Treasury Bill) increased by 25 basis points to 3.75 per cent. In October, SMART was 7.43 per cent, so the banks’ lending rate calculated for that month was 11.18 per cent.
The banking regulator has also hiked the interest on the Standing Lending Facility (SLF) by 75 basis points to 9.75 per cent and on the Standing Deposit Facility (SDF) by 50 basis points to 5.75 per cent.
On Sunday, BB’s Chief Economist Habibur Rahman shared the developments at a press conference at the central bank at Motijheel. BB spokesperson Mezbaul Haque was also present.
Habibur said, “We see no option now but to raise interest rates to control inflation. GDP growth is not our main goal at the moment. Our main objective is to bring inflation under control. If necessary, GDP growth will drop slightly. The main problem should be addressed first.”
BB wants to reduce inflation to 8 per cent by December and 6 per cent by June next year. To reach this target, the decision to increase the policy rate again may come, said BB officials.
Talking to The Business Post, Policy Research Institute of Bangladesh (PRI) Executive Director Ahsan H Mansur said, “Policy rate works when the lending rate rises, otherwise it won't work in favour of the economy. I think BB has made a good decision by increasing the policy rate."
He also said that the central bank is trying to control the lending rate through the SMART rate but it should be market-based.
In response to a question, the BB chief economist told reporters that economic decisions take some time to bear fruit while adverse weather conditions hamper the desired results. “Earlier, we took several decisions but due to the rainy season, we did not get good results. Now that there is no problem due to weather, we hope to reach the desired goal soon.”
The policy rate is the core interest rate in a country. If this rate increases, all types of interest increases. As a result, money becomes costly and people borrow less from banks, thereby reducing the flow of money in the market.
This move helps to cut the inflation rate which goes up when the money flow increases. Central banks around the world use the policy rates as an important tool of monetary policy.
Many countries like Bangladesh are raising policy rates to control inflation. In neighbouring India, it has been increased to 6.5 per cent, while this rate is 5.36 per cent in the US.
Since last year, Bangladesh has been facing high inflationary pressure due to the USD crisis and increased prices of products in the global market.
In October, the inflation rate was 9.92 per cent. It was 9.94 per cent in May. Also, Bangladesh is now seeing 12.5 per cent food inflation, which is highest in the last decade.
After Pakistan, Bangladesh’s inflation rate is the highest in South Asia. In this region, Sri Lanka showed the best performance to reduce inflation in recent times, by bringing down the rate from 53 per cent to 1 per cent between January and October this year alone.
To tame the inflation rate, the central bank earlier this year had increased the policy rate by 25 basis points to 6 per cent in January; by 50 basis points to 6.5 per cent back in July and by 75 basis points to 7.25 per cent in October.
In 2020, the regulator cut the policy rate three times to implement its unconventional monetary policy against the backdrop of the Covid-19 pandemic. In July of that year, BB had slashed the repo rate by 50 basis points to 4.75 per cent.
