The Bangladesh Bank (BB) maintained a contractionary monetary policy stance in H1 FY26, holding the policy rate at 10 per cent to curb inflation.
But analysis shows that inflows from remittances have far outpaced the central bank's efforts to restrain liquidity, leaving monetary tightening largely symbolic. From July to December, total remittances reached USD 16.26 billion. At an average exchange rate of Tk122 per dollar, BB's foreign currency purchases injected approximately Tk1.99 trillion directly into the banking system.
Cash incentives provided on remittances further added around Tk40-50 billion to the circulating Taka, bringing the total remittance-linked liquidity to about Tk2.03-2.04 trillion.
* Remittances ($16.26B) injected up toTk 2 trillion overwhelmed BB's tightening monetary policy.
* Net extra liquidity still up to Tk1.3-1.4 trillion after absorption.
* Policy rate 10pc to tight on paper, but loose/accommodative in reality.
* Inflation eased to 8-9pc, yet BB's control remains limited by huge inflows.
Net liquidity in the market after accounting for BB's absorption through open market operations, SDF (Standing Lending Facility) placements and slower private credit growth is estimated at around Tk1.3-1.4 trillion. This liquidity is circulating primarily as deposits in commercial banks, providing them with funds to lend to large corporates, manage remittance payments, and maintain interbank liquidity.
Significant portions also reside in short-term placements, current accounts and cash balances held by banks, effectively keeping the banking system flush even as policy rates remain high.
Headline inflation in the same period eased to the 8-9 per cent range, a decline from earlier peaks, but it remained above the central bank's comfort zone. At Tk122 per dollar, remittances dominated market liquidity, effectively neutralizing the impact of BB's absorption measures.
The slowdown in private credit provided some space for banks to process these inflows, but it was insufficient to offset the sheer scale of taka entering the system. Monetary policy in this period was tight on paper but accommodative in practice, with remittance-driven liquidity and government incentives overpowering the contractionary stance.
The trend underscores that, while inflation has moderated, the central bank's ability to restrict money supply is limited when external inflows are robust, leaving policy effectiveness constrained despite high interest rates.
Analysts point out that without stronger sterilization or a slowdown in remittances, BB's so-called contractionary measures will continue to be largely nominal, with actual liquidity conditions reflecting expansion rather than restraint.
A senior BB official said, "Based on remittance inflows of $16.26 billion at Tk122 per dollar and estimated cash incentives of Tk45 billion, total Taka liquidity entering the system in H1 FY26 reached roughly Tk2.03 trillion.
Against this, BB's absorption through OMOs, SDF placements and slower private credit creation captured only Tk600-700 billion, leaving a net liquidity expansion of Tk1.33-1.43 trillion. This shows that even high policy rates could not neutralize external inflows, highlighting a fundamental limitation in contractionary effectiveness."
Another BB official said, "Net liquidity from remittances primarily resides in commercial bank deposits, interbank placements and cash balances, providing ample capacity for banks to process further remittance flows or lend to large corporates."
He said, "Most of the extra money from remittances is sitting in banks as deposits or cash that banks keep for short-term needs. About 60-70 percent of the Tk1.3-1.4 trillion is in regular bank accounts and savings, while the rest is in short-term loans or reserves.
