Bangladesh's central bank has slashed its policy rates by 50 basis points in order to spur investment, in a move described by Bangladesh Bank (BB) Governor Dr Atiur Rahman as “cautious but supportive.”
He said the cuts would bring the policy rates into alignment with market rates.
At the unveiling of the half-yearly monetary policy statement (MPS) on Thursday, Atiur announced that the repo rate – the rate at which the central bank lends to other banks – had been cut by 0.5 percentage points to 6.75% and the reverse repo rate by 0.5 percentage points to 4.75%.
"With continued political stability, growth could reach 7%"
The central banker said broad money and private sector credit growth were projected at 15% and 14.8%, respectively.
He said growth would be fuelled by two engines – export and domestic demand.
“To avoid confusion, let me stress: it is not either or, it is and,” Atiur said as he announced the MPS for the second half of the fiscal year.
An analyst, asking not to be named, said the rate cut was necessary to bring balance to the market at a time when the weighted average deposit rate of banks stands at 6.46% (as on November 2015) while the repo rate was previously at 7.25%.
The cost of borrowing money from the central bank is higher for banks than to borrow money from the public in the form of deposits, he said.
“The reduction in the reverse repo will make parking money with the central bank unattractive for banks, incentivising them to increase lending,” the analyst said.
The BB governor said exports had picked up, capital machinery imports had seen robust growth in recent months and private sector credit growth had seen a 50 basis point rise since the last MPS in June 2015.
Moreover, he said interest rates had declined, with spreads now less than 5%.
Bangladesh Bank currently projects FY2016 growth at 6.8 – 6.9% and inflation at 6.1% in June 2016.
“With continued political stability, growth could reach 7%,” he said.