BB ups policy rate to 5.75% to tame inflation

The Bangladesh Bank (BB) has raised its key interest rate, which is also known as the policy rate, for the third time this year from 5.50 per cent to 5.75 per cent to tackle inflationary pressure.

The central bank made the announcement in a circular on Thursday.

The rate, which is termed the repurchase agreement (repo), is a pivotal benchmark interest rate followed by commercial banks to set the interest rates on both loans and deposits.

Earlier, on May 29, BB increased the rate at a 25-point basis from 4.75 per cent to 5 per cent after a decade, as the country is suffering from inflationary pressure following the Russia-Ukraine war and increased domestic demand as the Covid-19 pandemic situation improved.

On June 30, BB increased the rate from 5 per cent to 5.50 per cent for the second time.

Not only BB, but the central banks of many countries around the world have also increased their policy rates to tackle inflationary pressure. Hiking the repo rate means the taka will be costlier, which will subsequently help contain inflation.

BB assistant spokesperson Abul Kalam Azad told The Business Post, “It’s kind of an adjustment. The central bank has increased the rate since the inflationary pressure is high.”

In July, the inflation rate was at 7.48 per cent. The Bangladesh Bureau of Statistics (BBS) is yet to publish the rate for August as September draws to a close. Experts and sectorial people expected inflation to reach 9 per cent in August.

Bankers and experts have said that keeping the interest cap on the lending rate will not help achieve BB’s aim.

Mutual Trust Bank Limited Managing Director and CEO Syed Mahbubur Rahman told The Business Post that hiking the repo rate increases the bank’s cost. “In this, banks will want to borrow less money from BB. But for the economy and our business, we have to take loans.”

Zahid Hussain, the former lead economist of World Bank’s Dhaka Office, said that there will be no benefit from increasing the policy rate if the interest rate cap is kept in place.

“Due to this, the liquidity of the banks will decrease slightly, resulting in less lending. BB may be looking to reduce loan disbursement by reducing supply,” he said.

“But the real policy rate is the lending rate. If it’s not increased, credit demand will not decrease since the money required for bank loans does not come from the repo market,” Zahid added.

Mahbubur agreed with him and said that the lending rate should be increased even on a limited scale.

“I think a 2 or 3 per cent hike is needed. Because private sector credit growth is increasing despite the ongoing inflationary pressure. We don’t know whether all loans are spent on productive sectors and that’s why the credit demand needs to be reduced,” he added.

The private sector credit growth is nearing the fiscal target as much of the growth was driven by higher working capital requirements owing to rising inflation.

In August, credit grew at 14.07 per cent — only 3 percentage points away from 14.10 per cent set by BB for the current fiscal year (2022-23).

The central bank set a 9 per cent interest cap on the lending rate, except for credit cards, in 2020 in line with a government directive. However, the interest rate on export credit at the pre-shipment level remained unchanged at 7 per cent.

Bank owners already have requested BB to increase the loan interest rate.

In a letter sent to the central bank on July 19, the Bangladesh Association of Banks demanded an increase in interest rates on non-productive and import-dependent industries, CMSME and retail sector loans.