The Bangladesh Bank has unveiled an interest rate focused Monetary Policy stance for the first half of FY24, withdrawing the interest rate cap and hiking the policy rate to tame skyrocketing inflation.
Policy rate, which is the interest rate at which the regulator is lending money to commercial banks, has been hiked to 6.50 per cent from 6 per cent in a bid to make money costlier.
Central bank Governor Abdur Rouf Talukder revealed the Monetary Policy Statement (MPS) for July-December period of FY24 at the Bangladesh Bank headquarters on Sunday.
People have been struggling to survive amid the economic headwinds, and the MPS aims to tackle the ongoing crisis. Inflation raced to an 11 year high of 9.94 per cent this May, show data from the Bangladesh Bureau of Statistics (BBS).
Many however argue that the actual inflation is more than what the official data represents.
Amid such circumstances, the central bank finally removed the lending rate cap and introduced a new market-based reference rate along with a margin after three years, as it had fixed the 9 per cent lending rate in April 2020.
As part of this move, the central bank fixed 3 per cent interest margin on the six months moving average rate of the yields of 182 days Treasury bill for lending from banks. The margin will be 5 per cent on six months moving average rate of the treasury bill yields for lending from non-bank financial institutions (NBFIs).
Lending activities for cottage, micro, small and medium enterprises (CMSMEs) and consumer loans may be subject to an additional fee of up to 1 per cent to cover supervision costs. There will be no change in the interest rates applicable to credit card loans.
The six months average yield rate of 180 days treasury bills currently stands at 7.11 per cent, and when the 3 per cent interest margin is added, the maximum interest rate would be at 10.11 per cent for lending from banks.
Lending rate from the NBFIs will be at 12.11 per cent.
Talukder said both the introduction and the withdrawal of the 9 per cent lending rate are political decisions.
“This is to our credit that we were able to convince the policymakers that the interest rate cap needs to be withdrawn,” said the central bank chief.
As part of the tight monetary stance, the central bank has increased the policy rate, also known as the repo rate, by 50 basis points to 6.50 per cent and the reserve repo rate by 25 basis points to 4.50 per cent, effective from July 1.
“Our foremost focus is to tame inflation by raising borrowing costs through the policy rate,” said Talukder.
In the upcoming fiscal year, the government target is to keep the inflation rate at 6 per cent. The inter-bank call money rate will be close to the policy interest rate of 6.50 per cent, as per the MPS for July to December.
Speaking to The Business Post, former lead economist of World Bank Dhaka Office Zahid Hussain said, “Measurers taken in the MPS are too little for tackling the rising inflation.
“The banking regulator hiked the policy rate, which is a good move for making money costlier. But at the same time, it introduced a new lending rate system instead of a 9 per cent lending rate cap, which is not a very effective measure to curb inflation.”
Pointing out that the lending rate will be at highest 10.11 per cent because the yields of 182 days Treasury bill remains around 7 per cent, Hussain suggested that the lending rate will have to be fully market-based, otherwise it would not help to tame the inflation.
Ensuring unified exchange rate regime
The Bangladesh Bank will implement a unified and market-driven single exchange rate regime, enabling the exchange rate between the local currency, taka, and USD or any other foreign currency to be determined by the market.
Besides, the regulator will discontinue quoting specific rates for buying or selling foreign exchange, fostering stability in the foreign exchange market, as per the Monetary Policy Statement.
The central bank will not sell any forex at a discounted rate from July 1 of this year, and after this date, if the regulator needs to sell or buy any foreign exchange to or from the market, it will follow the interbank market rates.
Voicing his criticism, Zahid Hussain said there is no complete guideline in the MPS about the uniform exchange rate.
The central bank will calculate and publish the gross international reserves in line with the International Monetary Fund's (IMF) 6th edition of the Balance of Payment and International Investment Position Manual (BPM6).
The Bangladesh Bank governor said tackling the volatility in the forex market and the steadily falling trend of forex reserves are currently two major challenges faced by the country.
He pointed out that the forex market will cool down in the upcoming days, because the import payments have already dropped due to central bank initiatives.
During the July-May period of FY23, opening of LCs fell by 25.34 per cent, and LC settlements fell by 9.76 per cent, owing to austerity measures by the government, and strengthened monitoring of imports by the Bangladesh Bank.
The banking regulator pumped over $13 billion into banks from July to June 15 of this FY. The country’s gross forex reserves came down to $29.83 billion on June 14, from $41.43 billion compared year-on-year, show data from the Bangladesh Bank.
Replying to a question, the central bank governor said, "We will be able to convince the IMF to give us the loan's second installment even if we fail to maintain the net international reserves at $24.46 billion by June this year.”
Mentioning the IMF condition, Talukder said, “We have no other option but to comply with the IMF condition, because we are receiving cheap loans from the global lender.”
Private sector credit growth
The private sector credit growth is projected at 11 per cent for the upcoming fiscal year, down from 14.10 per cent in the current FY. The actual private sector credit growth was at 11.10 per cent in May of this year.
On the other hand, the projection for net foreign assets growth of the banking system in FY24 is expected to be positive with a rise of 4.9 per cent.
In a reaction, Executive Director of the South Asian Network on Economic Modeling (SANEM) Selim Raihan said, “We welcome the new monetary policy statement issued by the Bangladesh Bank.
“It seems that there will be some changes in policy on important fronts and such change will hopefully bring good things in the days ahead.”
