Policy rate raised to tame inflation

The Bangladesh Bank on Sunday raised the policy rate – also known as repo rate – by 25 basis points to 5 per cent in order to tame the uncontrolled inflation, triggered by an ongoing supply chain disruption worldwide, and uncertainty in the global economy due to the Russia-Ukraine war.

This decision came from the 54th meeting of the central bank’s Monetary Policy Committee on Sunday. Policy or repo rate is a rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds.

The banking regulator made the decision considering the overall present macroeconomic situation, and in a bid to contain the inflationary pressure, read a central bank notice on the same day.

Inflation rose to 6.29 percent in April – the highest in 18 months, shows data from the Bangladesh Bureau of Statistics (BBS).  In March, overall inflation was 6.22 per cent. Economists, however, said the BBS data does not reflect the actual situation of inflation in Bangladesh.

The central bank notice mentioned that the rising global demand, disruption of global trade and supply chain, and the ongoing Russia-Ukraine war created new uncertainty in the global economy, which pushed up the fuel oil prices in the international market.

The global economy has recovered thanks to the decline of Covid-19 infections, expansionary monetary and revenue policies of governments and central banks of different nations. This in turn increased pressure on the global supply chain, it added.

The central bank had previously hiked the policy rate back on January 5 of 2012, raising it by 50 basis points to 7.75 per cent. The rate then declined over the years.

It had cut the policy rate three times in 2020 to implement its unconventional monetary policy due to the Covid-19 pandemic. In July 2020, the central bank slashed the rate by 50 basis points to 4.75 per cent.

Speaking to The Business Post, Bangladesh Bank Chief Economist Habibur Rahman said, “The central bank has increased the policy rate considering the overall aspect of our country’s economy.

“We see that the call money rate has increased and the inflation has also gone up. Under such circumstances, the central bank’s Monetary Policy Committee decided to increase the policy rate to tackle the rising inflation.”

In response to a question regarding the possibility of lending rates going up in the coming days, the economist said this slight increase may not be a problem for the interest rate of banks, because the average interest rate on lending is still below 9 per cent.

Habibur however added that the central bank may consider lifting the interest rate cap if necessary.

Forex crisis putting pressure on banks

Bangladesh’s banking sector is currently facing liquidity pressure due to the ongoing volatility in the forex market. At the end of April, excess liquidity in banks stood at around Tk 1,90,000 crore, down from Tk 2,00,000 crore a month ago.

Insiders say the country’s rising import payments are the key reason behind this decline. Surplus funds in the banking industry hit an all-time high of Tk 2,31,711 crore at the end of June last year.

Addressing the issue, former lead economist of the World Bank Dhaka office Zahid Hussain said, “Bangladesh has finally moved towards increasing the policy rate to tackle inflation in line with other countries across the globe.

“The UK, USA, and other countries are expected to succeed in their goal to tame their inflation by increasing the policy rate because they did not impose any cap on market interest rates.”

He continued, “If the Bangladesh Bank does not lift the interest rate cap, the demand for loans will not decrease. And without that move, it will not be possible to tackle inflation as the expected level, even by raising the policy rate.”

However, it is learnt that the cap in lending rate is likely to be lifted, or increased soon to get the benefits of raising policy rate.