The Bangladesh Bank has raised the policy interest rate yet again in the new monetary policy to bring down inflation to 7.5 per cent. The regulator however remains unwilling to leave the interest rate entirely to the market.
The policy rate has been increased by 25 basis points to 8 per cent. Besides, the crawling peg system has been introduced to prevent volatility in the foreign exchange market. The regulator expects that the USD price can be gradually adjusted and stability will return to the market.
Central bank Governor Abdur Rouf Talukder expressed this expectation in the Monetary Policy Statement (MPS), announced on Wednesday for the January-June period of FY24.
He added that even if interest rates are not completely left to the market, contractionary monetary policy will continue until inflation gets under control.
Mentioning that a monetary policy takes time to create an impact on taming inflation, Talukder said, “The inflation rate is currently decreasing slowly. In the next few months, this rate will drop more as the policy rate has been increased.
“By June FY24, there is a target to bring down the inflation rate to 7.5 per cent.”
He continued, “Bangladesh could not decrease the inflation rate due to non-economic factors. Five Islamic banks have been suffering a liquidity crunch since mid-2022. These banks have structural problems.
“The banking sector weakened because of them. The conventional banks too need Tk 30,000 crores to 35,000 crores every day. On the other hand, the central bank stopped the injection of high-powered money into the market in August last year.”
Talukder pointed out, “The weak banks, which have been identified, are improving gradually. We are focusing on them for more improvement so that they can cover up their capital shortfall.
The country has been facing a USD crisis since 2022, making it very difficult for Banks to open letters of credit (LCs). The regulator is selling USD from reserves to the banks. The money is flowing from the banks to the regulator, triggering a persistent liquidity crisis.
The central bank says that the economy of Bangladesh is facing challenges due to various internal and external factors. Despite these challenges, they believe it will be possible to achieve a GDP growth of 6.5 per cent in FY24 by keeping inflation at 7.5 per cent through successful implementation of the new MPS.
In the current fiscal year's budget, the GDP growth target was set at 7.5 per cent, but later it was reduced to 6.5 per cent. On the other hand, the inflation target was initially fixed at 6 per cent, and then it was increased to 7.5 per cent.
Meanwhile, the average inflation for the first six months (July-December) of FY24 was 9.67 per cent. Although in the first half of the monetary policy, the Bangladesh Bank said to implement the 6 per cent target in the budget. But it could not be implemented.
The country’s overall inflation eased slightly to 9.41 per cent last December, compared to 9.49 per cent recorded in November 2023. The December figure was the lowest posted in the last eight months.
Forex market
Abdur Rouf Talukder said, “Currently, the USD market is volatile. We are not going for a floating exchange rate for USD, as we have decided that the volatile market would become stable through the crawling peg system.”
Saleh Uddin Ahmed, former governor of the central bank, told The Business Post, “The regulator adopted a contractionary monetary policy, which is a very old method for curbing inflation.
“The central bank is trying to tame inflation through the increase of the policy rate. The inflation is rising because the market is being controlled by influential groups. As a result, the public is suffering.”
Private sector credit growth
Actual private sector credit growth was 10.2 per cent at the end of December 2023, which was projected at 10.9 per cent in the MPS for H1 FY24. In new MPS, the new target is 10 per cent for June this year.
The public sector credit growth was 18 per cent at the end of December last year, against the 37.9 per cent target. The public sector credit growth target was slashed by the central bank to 31 per cent for the second half of FY24, mentions the monetary policy.
Former director general (DG) of Bangladesh Institute of Bank Management (BIBM) Dr Toufic Ahmad Choudhury said, “The central bank has increased the policy rate, and this move will increase the banks’ interest rates.
“This in turn will help curb the high inflation.”
He added, “The prices of essential commodities are increasing as the businesses are controlling the whole market system. As a result, this monetary policy may not be effective in the money and forex market.
Concluding his remark, Toufic welcomes the crawling peg exchange rate system as it was recommended by the International Monetary Policy (IMF).
