With the growing inflation rate showing indications of slowing down, the Bangladesh Bank is projected to keep the policy rate at 10% and implement contractionary monetary policy for the second half of the current fiscal year. Furthermore, there is minimal possibility that the exchange rate will alter because senior central bank officials have stated that the initial choice is to keep the growth of private sector credit at the same pace. In the afternoon, Governor Ahsan H. Mansur is expected to announce the new monetary policy for the January–June period, which will be approved by the central bank’s board this morning. The interest rate that a central bank sets to affect interest rates in the economy and meet its inflation goals is known as the policy rate.
The repurchase agreement (Repo) rate is another name for it. When commercial banks borrow money from the central bank overnight, they are charged the repo rate. Higher lending and deposit rates result from banks having to pay more to borrow money if the Repo rate rises. However, banks and customers won’t have to pay more in interest because the central bank won’t boost the repo rate. Banks currently offer a maximum of 14% for loans and 11% for deposits. Speaking on condition of anonymity, a senior central bank official told The Business Standard, “We were keeping an eye on the January inflation figure to decide whether to raise the policy rate. We advise maintaining the policy rate at its current level of 10%, which is marginally higher than inflation, given that the inflation rate dropped below 10% in January.
The general inflation rate decreased from 10.89% in December to 9.94% in January, largely due to the decline in food inflation. Inflation has reverted to a single-digit rate for the first time in three months. Inflation was 9.92% in September 2024, the last time it was below 10%. Since March 2023, the overall rate of inflation has been more than 9%. “The policy rate was raised several times in the first half of the current fiscal year, but there is no need to raise it further at this time,” Fahmida Khatun, executive director of the Centre for Policy Dialogue and a member of the central bank’s board of directors, told TBS. She clarified that it takes roughly a year for changes in the policy rate to have an impact on the economy, which is why inflation has not dropped in spite of the rate hikes. Consequently, surveillance is required. Furthermore, the economist noted that lowering inflation calls for more than just raising the policy rate; supply-side interventions, currency rate stability, and other actions are also required.
The central bank claims that two hikes in the first half of 2024 raised the policy rate by 2.25 percentage points, to 7.75%, from the start of the year. The policy rate was set at 8.50% when the temporary administration assumed office in August 2024, and by October, it had been raised in three stages to 10%. “We won’t be able to completely evaluate the effects of these rate increases until at least next June or July. Although inflation has decreased during the past two months, Fahmida Khatun questioned if this trend would endure. She pointed out that many nations take a year or more to lower the policy rate following an increase. For instance, it took the US central bank over a year to reduce its policy rate. As a result, any move to lower the policy rate will be contingent upon inflation stabilizing. As previously stated by Governor Mansur, the goal is to lower inflation to 6–7% by June–July. The new monetary policy has kept the private sector credit growth target at 9.8% for the July–December FY25 period, according to a senior central bank official.
But in December, real private sector loan growth was only 7.24%, the lowest level in 11 years. Fahmida Khatun thinks that because investors are hesitant to make new investments in the current climate, it will be impossible to meet the credit growth objective in the upcoming six months. As investors look for long-term stability, she doesn’t think anything will change until the next election. As a result, it appears that the credit growth target is unattainable. The new monetary policy is not expected to include any new exchange rate restrictions. At the moment, the central bank has verbally directed banks to maintain the dollar rate at Tk122. At a higher rate of Tk122.50, banks are allegedly purchasing remittance dollars.
Source: The Business Standard
