BB plans tough measures to tame rising inflation

The Bangladesh Bank is going to unveil the Monetary Policy Statement (MPS) for FY23 today, which may contain tough measures to rein in soaring inflation and attain the government’s gross domestic product (GDP) growth target.

It is likely to increase the private credit growth target from the actual growth to attain the 7.5 per cent GDP growth target set for the next fiscal year.

In the MPS for FY22, the central bank set a target to attain 14.8 per cent private credit growth. In May this year, private credit growth reached 12.94 per cent.

Chief Economist of the Bangladesh Bank Md Habibur Rahman told The Business Post there would be mixed measures in the MPS, which would mainly focus on controlling the rising inflation.

As part of controlling inflation, the central bank on May 29 raised the repo rate by 25 basis points to 5 per cent – the first hike since January 5, 2012 – to tackle inflationary pressure.

Governor of the central bank Fazle Kabir, whose tenure will end on July 3, will unveil the MPS at 3pm at the central bank headquarters in the capital’s Motijheel.

The Bangladesh Bank decided not to unveil the MPS virtually this year as the Covid-19 pandemic has subsided.

The central bank officials involved in formulating the MPS said it was a complex task as the economy was going through tough times due to various external and internal shocks.

Amid the recovery from the pandemic, inflation started to jump due to the price rise of commodities in the world market and the increase in global fuel prices caused by the Russia-Ukraine war.

In May, overall inflation hit 7.42 per cent – the highest in eight years. The government has targeted to keep the average inflation rate at 5.6 per cent in the upcoming fiscal year.

The central bank generally formulates the MPS to attain the government’s GDP growth target and keep inflation at a reasonable level. But this year is exceptional due to the forex market volatility, the Russia-Ukraine war, floods, and recovery from the deadly pandemic, said central bank officials.

Trade deficit – the gap between export earnings and import expenditures – reached a historic high at $27.56 billion during the July-April period of the current fiscal year due to increasing import payments amid the pandemic.

During these 10 months, imports rose by 42 per cent to $68 billion while export earnings grew by 34 per cent to $41 billion, as per the central bank data.

Growing import payments and the slow trend in remittances put pressure on the forex market. The local currency was devalued by 8.66 per cent against the US dollar in six months of this year due to the latter’s shortage in the market.

On Wednesday, the inter-bank exchange rate stood at Tk 93.45 per dollar while it neared Tk 100 in the kerb market.

The recovery from the pandemic and growing import financing boosted private sector credit growth in May this year, but the growth is still below the central bank target.

Private sector credit growth accelerated to 12.94 per cent in May – the highest since January 2019, when it was 13.2 per cent. It was 1.86 percentage points lower than the Bangladesh Bank’s target for the current fiscal year.

Former lead economist of the World Bank’s Dhaka office Zahid Hussain told The Business Post the monetary policy would have no positive effect on the economy unless the interest rate cap on lending was lifted.

“Just setting a target in the monetary policy is not enough. The central bank needs to stop illogical interventions in interest and exchange rates,” he added.