Contractionary monetary policy for H1 FY24 on cards

Bangladesh Bank (BB) is getting prepared to unveil a contractionary monetary policy for the first half of the upcoming FY2023-24, aiming to tame the skyrocketing inflation.

This year, the central bank is preparing the Monetary Policy Statement (MPS) at a time when inflation raced to an 11-year high of 9.94 per cent in May.

BB’s Monetary Policy Committee held an internal meeting on Sunday and decided to unveil the MPS on June 18.

The monetary policy would be a cautious one as the country is facing several challenges, including a crisis in the foreign exchange market, said the central bank’s Chief Economist Md Habibur Rahman.

He said that taming inflation is the foremost priority in the upcoming MPS while the interest rate corridor system, uniform exchange rate and reserves calculation will get importance too.

Another BB official, who is involved in preparing the MPS, told The Business Post that policy reforms will also get priority in the upcoming monetary policy.

BB plans to fix the 3 per cent interest corridor on the interest rate of 180-day treasury bills for lending instead of the current 9 per cent lending rate.

The banking regulator is going to introduce the new interest rate system after three years. BB fixed the 9 per cent lending rate in April 2020. The BB has already withdrawn the single-digit lending rate on consumer loans in the current monetary policy.

The uniform exchange rate is another reform that will feature the MPS in line with IMF recommendations as the country now has different exchange rates.

Economist Zahid Hussain thinks the upcoming monetary policy will be as usual, apart from a few policy reforms to meet the IMF recommendations.

“The interest corridor on lending and a uniform exchange rate are the two major reforms in the upcoming MPS.

It will be important to see how the central bank manages the interest rate corridor,” said Zahid, a former lead economist of the World Bank’s Dhaka office.

The monetary policy statement should have explanations on this issue, he added. He said that now the interbank exchange rate is almost inactive as the rate is higher than the rate BB shows on its website.

BB will have to reform those policies in the monetary policy as it has to execute the IMF conditions from the next fiscal year before getting the second instalment of the global lender’s $4.7 billion loans for the country’s economy.