Bangladesh Bank unveils monetary policy for FY2022-23 focusing on taming inflation and exchange rate.
In the new policy, they raised its key interest rate, also known as the policy rate, by 50 basis points to 5.5%. Earlier, the policy rate was 5%.
Earlier on May 29 this year, the central bank increased the repo rate from 4.75% to 5 points after almost two years. In July 2020, the central bank reduced the policy rate by 50 basis points from 5.25% to 4.75%.
Bangladesh Bank thinks this move would make funds costlier for banks and tighten the money flow.
On Thursday, Governor Fazle Kabir unveiled the Monetary Policy Statement for the next fiscal year at the central bank headquarters in Dhaka.
This is the last monetary policy announcement by the incumbent governor Fazle Kabir as his tenure will end on July 3.
According to the FY23 monetary policy, the private sector credit growth ceiling has been set at 14.1%, down from the 14.8% set for the outgoing fiscal year.
Bangladesh Bank will introduce a new refinance line of credit for import-substituting products to minimize import dependency and save valuable foreign exchange reserves.
The LC margins for luxury goods, imported fruits, non-cereal foods, canned and processed foods will be increased comprehensively to discourage their imports.
The central bank will continue its support to implement the government's ongoing stimulus packages alongside its refinance schemes in the face of new adversities, including the Russia-Ukraine war in addition to the Covid-19 pandemic.
Regarding the new monetary policy, Fazle Kabir said: “This is a review of the latest state of the global and domestic economy, and the recent economic impact of floods in the northeast shows that the main challenge for the monetary policy of FY2022-23 would be to stabilize the domestic exchange rate.”
“At the same time, continued support for ongoing economic recovery aimed at job creation is essential for the forthcoming monetary policy,” the governor added.
"Bangladesh Bank will continue to strive for the overall stability and long-term development of the capital market, which is essential for the development of the country's financial sector in FY2022-23 as it was in the past.
In order to increase the liquidity in the capital market, the size of the assistance fund for the affected small investors has been increased by Tk153 crore to Tk1,009 crore at the initiative of Bangladesh Bank.
"Apart from releasing Tk280 crore from this fund, Tk118 crore has been provided through repo under the facility of setting up a special fund of Tk200 crore for each bank's investment in the capital market", the governor explained.
It’s being also said that the inflation outlook might confront some uncertainties in FY23 because of increasing price pressures from supply-demand imbalances in the pace of rising demand, the unfavourable prognosis of the Russia-Ukraine war, and elevated global commodity prices.
Moreover, upward adjustments of administered energy prices have created some pressures on the non-food commodity prices partly due to increased production and transportation costs in the domestic economy.
Besides, inflation expectations might heighten owing to the rising fuel and edible oil price hike. The lagged pass-through to broader inflation from higher food and oil prices for import items could exert further pressure on domestic inflation. Additional risks might evolve from the external sector as the domestic currency is under depreciating pressure.
Moreover, the recent uptick in the asset price index, especially the real estate price index, may further exacerbate the upside risk of inflation. The current global commodity price hikes amid unfolding geopolitical conflicts may exert inflationary pressures in the coming days, making it challenging to maintain the target rate of inflation.
Bangladesh Bank's Modeling and Forecasting Unit's forecast and inflation expectation survey also show that a higher inflation trajectory will continue in FY23.
Based on the latest trend of available data, it is anticipated that the current account deficit might remain in the negative territory by around $16.5 billion at the end of FY23.
However, the increased outflow of wage earner remitters amid improved economic and working conditions in source countries on top of the base effect is expected to help the inward remittances grow by 15% in FY23. The export and import growth will also be moderated by the higher base effect, reaching 13 and 12% growth in FY23, respectively.
As a result, the overall balance (BoP) in FY23 is anticipated to be at a moderate deficit level, well supported by a befitting performance of the financial account.
Regarding movements of exchange rates and foreign exchange reserves, the monetary policy mentions that the commodity prices in the international markets have been soaring due to the post-Covid economic recovery-induced demand surge amid supply chain disruptions since the end of 2021.
The Russia-Ukraine war has aggravated the situation, pushing the global commodity prices and international transportation costs unusually high. Bangladesh is no exception, facing mounting exchange rates and inflationary pressure during the second half of FY22.
As of Tuesday, Bangladesh Bank’s foreign exchange reserves stood at $41.9 billion compared with $46.4 billion at the end of June 2021.
The nominal effective exchange rate index (NEER index) indicates a nominal depreciation of the taka against the basket of major trading partners' currencies, as it was below 100 until the end of May 2022.
Based on the latest available data, Bangladesh Bank’s projection suggests that the current depreciating pressure on the Taka-Dollar exchange rate will stabilize in the upcoming months.
The central bank's target is to keep inflation at 5.6% in line with the proposed budget, while GDP growth is expected to be 7.5%.
However, according to the finance minister's national budget speech, the government's desired GDP growth and inflation targets for FY 2022-23 are 7.5% and 5.6%, respectively.