BB for interest rate-focused monetary policy

Moving towards an interest rate-focused monetary policy framework can help to enhance the Bangladesh Bank’s monetary policy effectiveness, states the Monetary Policy Review 2022-23.

The regulator is set to unveil the Monetary Policy Statement (MPS) for FY24 on June 18.

It will introduce a market-based interest rate system instead of fixed lending rate in the next Monetary Policy to meet the prescription of the International Monetary Fund (IMF), as it approved $4.7 billion loans for Bangladesh.

Before the move, the Bangladesh Bank reviewed the MPS of the current FY, which was released on its website on June 1.

The review mentions that intervention in the foreign exchange market led to a monetary contraction and liquidity stress in the banking system, which was partially counteracted by liquidity support to the commercial banks and lending to the government by the central bank.

Nonetheless, the rising interest rates on deposits and in the interbank market justify lifting the interest rate cap on lending, it read. The regulator needs to be cautiously proactive and vigilant in anchoring inflation expectations and limiting the second-round effect of inflation.

Non-food inflation remained persistently high over 9 per cent on average during the nine months of FY23.

However, the potential instability of money demand resulted from increasing financial innovations, and deepening and evolving financial structure in a growing economy, read the review report.

Bangladesh Bank governor Abdur Rouf Talukder mentions in the report that the country’s economy faced multi-dimensional challenges stemming from global economic uncertainties and intense pressure on the balance of payments, leading to a sharp depreciation of the exchange rate.

After a strong rebound from the shock of the Covid-19 pandemic with real GDP growth rates of 6.94 per cent and 7.10 per cent in FY21 and FY22, respectively.

The Bangladesh economy faced challenges due to growing global economic uncertainties stemming from the war in Ukraine, intense pressure on the balance of payments, sharp depreciation of the exchange rate, rationing of electricity supply, and upward revision of fuel and energy prices in the domestic market, as per the report.

He said those unfavourable developments hindered growth momentum and resulted in persistently high inflation in FY23.

The financial account became a deficit in FY23 for the first time since FY10, said the review report adding that this deficit was driven mainly by slow long-term private foreign loan inflows amid rising global economic uncertainties, faster repayment of short-term private foreign borrowings than receipts to avoid additional costs arising from the rising international base interest rate.

The contractionary effects of selling foreign currency by the Bangladesh Bank, a sudden rise in cash withdrawal from banks by the depositors, and sluggish deposit growth, resulted in a tighter liquidity condition in the banking system, read the report.