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BB unveils tight monetary policy aiming to curb inflation

Published : Friday, 19 July, 2024 at 12:00 AM  Count : 110
Business Correspondent
Bangladesh Bank (BB) on Thursday unveiled the tight monetary policy for the first half (July-December) of current financial year (FY25) over its website with various stringent steps making bank borrowings costly.

The central bank resorts to unveiling the policy through website avoiding the traditional press conference as journalist are boycotting the central bank events for denying them access to the central bank for reporting on its alleged irregularities.
 
The new policy as its stands is align with the government's budgetary target of reducing inflation to around 6.5 percent by the end of FY25, which is consistent with BB's internal forecasts.

By closely monitoring prices and other domestic and international macroeconomic developments, BB has decided to maintain its cautiously tight monetary policy stance for the first half of FY25. 

BB's Monetary Policy Committee (MPC) has decided to keep the policy (Repo) rate unchanged at 8.50 percent, with SDF (standing drawing facility) rate at 7.0 percent and the SLF (standing lending facility) rate at 10.0 percent. 

Additionally, BB will continue its quantitative tightening bias by streamlining open market operations, ceasing currency swaps among banks and BB, and refraining from creating new money to finance government spending. However, BB remains ready to take any necessary policy actions should the situation demand it.

The monetary policy states since mid-2022, Taka-Dollar exchange rates have experienced sustained depreciation pressures driven by challenges in the external sector. In response, Bangladesh Bank (BB) has taken a gradual approach, allowing market forces to exert greater influence over the exchange rate. 

This strategy aimed to simplify the exchange rate framework by eliminating multiple rates for exports, imports, and remittances, enhancing transparency and efficiency in currency transactions.

To further stabilize the exchange rate and move towards a more flexible system, BB introduced a crawling peg system on May 8. This interim arrangement links Taka's value to a currency basket, with a mid-rate aligned with Real Effective Exchange Rate (REER) Index, reflecting market equilibrium. 

Implementing this system has notably reduced foreign exchange market volatility and narrowed the gap between formal and informal market exchange rates to a reasonable level. Additionally, recent liberalization initiatives in Bangladesh's foreign exchange policy, such as the RFCD, NFCD, and Offshore Banking Act 2024, are expected to bolster foreign exchange inflows.
 
These measures aim to alleviate pressure on the exchange rate and support rebuilding foreign exchange reserves, contributing to an overall stability in the currency market.

As the Forex market is showing reasonable stability and transactions are taking place within predefined bands, BB decides to keep the crawling peg mid-rate unchanged at Tk. 117.00 per USD. 

BB will also enhance import liberalization by removing LC margin requirements for all products except luxury goods like cars, fruits, flowers, cosmetics, and similar items, with margins determined based on bank-customer relationships. 

The crawling peg system is a transitional measure towards a fully flexible, market-based exchange rate system, aiming to stabilize exchange rate movements while preparing for broader market liberalization, the BB;s policy states.

On the other hand it has unchanged private sector credit growth to 9.8 per cent in December and the same rate in June next year of 9.8 per cent.

It has higher projection of money multiplier to 5.45 percent in December this year and 5.30 per cent in June coming year. Public sector credit growth has been projected at 14.2 per cent in December and 17.8 per cent in June coming year which may indeed increase government bank borrowing.



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