The monthly inflation rate in Bangladesh slightly dropped by 0.05 percentage points to 9.69 per cent in July from last month, according to the Bangladesh Bureau of Statistics (BBS).
The monthly data released on Sunday showed that the rate had dropped 0.2 percentage points in June from May. The country recorded the highest inflation rate of 9.94 per cent in May.
Although economists had said that the inflation rate would accelerate in June and July since the government imposed different types of tax measures in the FY2023-2024 budget, further pushing the prices of essential commodities up, in reality, that did not happen.
The government has set a target of keeping inflation at an average of 6 per cent in the FY24 national budget.
The Consumer Price Index (CPI) and Inflation Rate (Point to Point) for July showed that food inflation stood at 9.76 per cent in July, which was 9.73 per cent in June, meaning people still need to spend more for food and the trend is upward. Food inflation was at 9.24 per cent in May.
The non-food inflation stood at 9.47 per cent in July, which was 9.60 per cent in June and 9.96 per cent in May, which means people are expending less for non-food items as money goes to afford food items.
Overall inflation in rural areas stood at 9.75 per cent and in urban areas at 9.43 per cent in July. Meanwhile, the wage rate index climbed to 7.52 per cent last month, marking an increase from June's 7.39 per cent.
Ahsan H Mansur, economist and director of the Policy Research Institute of Bangladesh, said, “The fall in inflation in July is not significant. People are still struggling with high inflation. I don't see any signs of it slowing down soon. When food inflation rises, people reduce non-food consumption, so the non-food inflation rate appears less.”
He said that the inflation rate is higher in the villages than in the cities. The income of the people in the villages has increased. There are many changes in their diet. “As a result, they consume the same type of food that the city people consume.
“Apart from this, due to improved communication systems, the prices of goods in cities and villages now increase at the same rate,” he opined.
Urban inflation ratio still higher
The inflation rate has declined both in urban and rural areas but rural people are still facing a higher inflation rate than that of urban.
In the rural areas, the inflation rate dropped from June’s 9.82 per cent to 9.75 per cent in July while in the urban areas, it dropped from 9.45 per cent to 9.43 per cent.
Food inflation in urban areas stood at 9.63 per cent in July, up from June’s 9.26 per cent while in villages, it dropped from 9.95 per cent to 9.82 per cent.
On the non-food inflation index, the rate in rural areas dropped from June’s 9.52 per cent to 9.48 per cent in July. In urban areas, the rate dropped from 9.47 per cent to 9.20 per cent, according to the BBS data.
Inflation and interest rate
The thumb rule of the economy is interest rates must rise to reduce inflation. Bangladesh has been under high inflation pressure since last year following the US dollar crisis and the fuel price hikes. But BB was not in favour of hiking the interest rate to curb inflation.
The central bank recently lifted the interest rate cap in the monetary policy for the first half of FY24 and introduced the SMART (Six-Months Moving Average Rate of Treasury Bill) interest rate from July 1.
As per the current system, SMART will be determined based on the market interest rate on 182-day maturity Treasury Bills. A further 3 per cent margin can be added to this to set the bank loan interest rate.
Currently, the SMART rate is 7.10 per cent and in line with the new system, the interest rate on the bank loan is 10.10 per cent. But economists believe this interest rate is not enough to reduce inflation.
Ahsan said, “Where the developed countries have raised their interest rates by 5-6 per cent to curb inflation, we have raised it by only 1 per cent. This will not reduce inflation.
“If you want to reduce it, you must reduce the flow of money in the market and for this, the interest rate should be increased more.”
Meanwhile, to meet the budget deficit, the government is borrowing directly from BB instead of commercial banks. Economists said, in the accounting system, that is like printing money and only increases money flow in the market, fuelling inflation.
In FY23, the government’s net bank loan was Tk 1.24 lakh crore. Of that, Tk 97,684 crore was taken from the central bank.
On July 18, the first month of FY24, the government took a loan of Tk 1,543 crore from the central bank.
