To counter the persistent inflationary pressure, Bangladesh Bank (BB) has reaffirmed its commitment to a contractionary policy stance during the second half of FY24 (January-June), with the aim of bringing inflation down to 7.5%, announced on Wednesday.
In line with the government's economic goals, Bangladesh Bank's policies are designed to support the revised target of achieving a 6.5% Gross Domestic Product (GDP) growth while maintaining inflation within a maximum limit of 7.5% for FY24.
Inflation has been hovering around 9%, with food inflation in Bangladesh soaring to 12.54% in August 2023 - the highest level in the past 13 years, according to the Bangladesh Bureau of Statistics (BBS).
To implement this strategy, Bangladesh Bank has increased the benchmark policy rate by 25 basis points to 8%.
On the other hand, the Standing Deposit Facility (SDF) rate will experience a 75 basis points increase, rising to 6.50% from 5.75%. This adjustment narrows the policy rate corridor from ± 200 basis points to ± 150 basis points. Conversely, the Standing Lending Facility (SLF) rate will be reduced by 25 basis points, reaching 9.50% from 9.75%.
The announcement comes as the Bangladesh Bank unveiled the new monetary policy for the second half of the current fiscal year.
Regarding the new monetary policy, Bangladesh Bank Governor Abdur Rouf Talukder said: “I hope stability will come to the economy in the next 2-3 months. We will continue to try to bring inflation down to 6% as per our target.”
Regarding FY24's first six months monetary policies failing to give expected results as per the target, he said: “It takes some time to get the results of the monetary policy. Moreover, there are issues like fuel price, commodity price which cannot be controlled with the monetary policy.”
Various measures are being taken to prevent irregularities in the banking sector, mentioning that he said: “Some people are not afraid of anyone, they leave regular government jobs and join this contractual job.”
Meanwhile, economist Ahsan H Mansur, executive director of Policy Research Institute (PRI) feels that the steps taken by the Bangladesh Bank are weak.
He told the Dhaka Tribune that: "Bangladesh Bank's actions seem weak to me. Moreover, only a 0.25% policy rate hike will not work. It would be better if the policy interest rate were increased from 0.5% to 1%. Now, regarding Bangladesh Bank's action, It is better to say that we (Bangladesh Bank) will continue to raise interest rates until the inflation declines."
“Moreover, the target of 7.5% inflation is not so ambitious. As India is successfully moving towards keeping inflation between 3-4% and USA 2% to below 2%,” he said.
“The policy should not only be announced but also followed,” he added.
The new monetary policy statement also said, to tackle the inflation Bangladesh Bank will implement a crawling peg system to regulate unusual fluctuations in the foreign exchange (forex) rate value.
The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
Monetary policy also stated that, central bank today cut the private sector credit growth target to 10% from 11%.
Considering both the public and private sectors, domestic credit growth is projected to grow by 13.9% by the end of June 2024.
Crawling peg exchange rate
The Bangladesh Taka (BDT) against the USD maintains alignment with the market rate, supported by assessments using the Real Effective Exchange Rate (REER) Index and internal evaluations. While the BDT experienced a marginal depreciation from July to December 2023 compared to the same period the previous year, it currently stands at 110.00 per USD as of December 31, 2023.
This positioning remains broadly competitive among peer countries, reflected by the relative magnitude of recent depreciation of BDT vis-à-vis peer countries’ currencies.
In line with this, the Bangladesh Bank is planning to implement a crawling peg arrangement, in the interim, based on a currency basket, initially featuring a band corridor, before moving to a free-floating exchange rate regime.
This approach allows the exchange rate to move freely within the corridor while permitting intervention in foreign exchange markets to prevent rates from exceeding the set limits, aiming to mitigate unusual fluctuations.