Bangladesh Bank (BB) is poised to announce a new contractionary monetary policy in its website on Thursday for the first half of fiscal 2024-25 aiming at containing inflation. In the ongoing policy that expired on June 30, the policy rate is 8.5 per cent with a 3 per cent corridor in Standing Deposit Facility (SDF) and Standing Lending Facility (SLF).
BB will announce the monetary policy for the first time in its website breaking the tradition of announcing it in a press release.
As per this corridor the SDF rate is now 7 per cent and SLF rate is 10 per cent. This tightening of monetary policy is part of the central banks broader strategy to manage liquidity and control inflation, which has remained above 9 per cent.
According to a central bank official the BB is on tightening the monetary policy aiming to hike the policy rate to reduce the money supply, making borrowing more expensive and thereby slowing down consumer spending and investment.
This move is expected to help bring down inflation to more manageable levels. In the just expired policy the central banks aim was to reduce point-to-point inflation to 6 per cent in the near term. But it is unlikely to come in to reality.
In the latest policy BB governor Abdur Rouf Talukder emphasized that controlling inflation is the central banks primary focus, even if it means sacrificing some economic growth. "We do not have any headache about growth; inflation is our main target". But in the last six months there is however no visible development of controlling inflation.
In line with the International Monetary Funds (IMF) guidelines, the BB has also implemented a more flexible interest rate policy. The call money rate, which influences short-term borrowing costs, has been adjusted to reflect market conditions more accurately. Furthermore, the central bank has removed the specific deposit floor rate to allow for more market-driven interest rates.
To address liquidity issues in the banking sector, Bangladesh Bank has continued its efforts to mop up excess liquidity by selling foreign currency. Over the past three years, the central bank has sold $28.7 billion to stabilize the exchange rate.
This has contributed to a liquidity crunch in the banking sector, with daily borrowing from the central bank reaching Tk300 billion to Tk350 billion.
The BBs plan to implement a unified and market-driven single exchange rate policy has brought some relief. This system allowed the exchange rate to be determined by market forces and got some positive impact that the dollar prices are stabilize now.
When contacted a noted economist Professor M Abu Yousuf said despite these measures, economic challenges persist. The reduction in private sector credit growth indicates a cautious approach to managing economic expansion. The broad money supply target has also been trimmed to 9.7 per cent from the previous 10 per cent.
He said while some believe more aggressive measures are needed to contain inflation, others argue that the current steps are adequate but will take time to show results. The central banks cautious yet firm approach reflects its commitment to stabilizing the economy, even at the expense of short-term growth.
The BBs upcoming monetary policy aims to tackle inflation through a series of rate hikes and market-driven mechanisms. While the immediate impact on growth may be negative, the long-term goal of achieving economic stability remains the central focus, he said.
