BB reduces Bank Rate after 17 years

Bangladesh Bank (BB) has reduced bank interest rate or 'Bank Rate' by one percent after 17 years to expand the market for loans amid Covid-19 pandemic.

BB lends money to commercial banks and Non-Bank Financial Institutions (NBFI) at this rate which is the basic policy determining interest rate of the banking sector.

On Wednesday (July 29) afternoon, central bank issued a circular in this regard and sent it to the chief executives or managing director of commercial banks.

Bank rate has been stuck at 5 percent for the last 17 years. Now it has been reduced to 4 percent. This new bank rate has been in effect from Wednesday.

The country's top economists said, with this decision central bank sent a message to the market that it wants to cut interest rates by lowering bank rates.

Additionally, to reduce interest rate, BB policymakers have also taken steps to reduce treasury bill repurchase agreements or repo interest rates and reverse repo interest rates.

BB issued a separate circular in this regard and sent it to the chief executives of banks and financial institutions. The new interest rates for repo and reverse repo will be effective from Thursday (July 30).

According to central bank sources, these steps have been taken to increase the supply of money at low interest rates in the market to counter the effects of coronavirus pandemic. This will make it easier for entrepreneurs to get loans at a low interest rate.

In this context, former BB governor Salehuddin Ahmed said, in order to deal with the economic losses caused by the coronavirus pandemic, the provision to provide loans to the entrepreneurs must be increased. For this, interest rates must be reduced, and on the other hand, money must reach them quickly and easily. That means money must reach them quickly and at low cost. This will allow them to start a new business.

Last time bank rate was reduced was on November 8, 2003. At that time the rate was reduced from 6 percent to 5 percent. About 17 years have passed since then.

Although at different times the central bank has conducted various surveys to reduce this rate. Previously, central bank took steps to reduce interest rates, especially when there was a strong demand from entrepreneurs to do so. But all things considered, it was not reduced.

On November 24, 1996, bank rate was reduced from 9 percent to 8 percent. About two years later, on August 29, 1999, the rate was reduced to 7 percent. Two years later, the rate was further reduced by 1 percent to 6 percent on October 24, 2001. Three years later, it was reduced by another one percent to 5 percent on November 8, 2003.

Meanwhile, the repo interest rate has been reduced from 5.25 percent to 4.75 percent. This time, the rate has been reduced by three points. Reverse repo rate was 4.75 percent and reduced now to 4 percent.

Repo rate matters when to control the flow of money in the market and to provide loans to the government, the central bank withdraws money by selling treasury bills, bonds and Bangladesh Bank bills to commercial banks and financial institutions which is known as the as Treasury Bill Auction