Bangladesh Bank (BB) has cut its key interest rate by 50 basis points (bps) to 6.75% and repo rate by 50 basis points to 5.25%.
In the monetary policy statement (MPS) for the second half of the fiscal year 2015-16, the central bank also announced a downward revision in the private sector credit growth projection to 14.8% from the earlier 15% and public sector credit growth projection to 18.7% from 23.7%.
“Recent economic indicators point toward a solid growth momentum in this fiscal, as export is picking up, capital machinery import grows robustly and private sector credit growth ups,” said BB Governor Atiur Rahman while unveiling the MPS in its headquarters in the capital yesterday.
“Balancing the latest output and price considerations, we maintain a cautious but supportive stance,” he said.
The governor said the policy rate cut and downward revision of credit growth target will spur the expected GDP growth.
BB has brought changes in policy rate after three years since February 2013.
In the latest MPS, it projected GDP growth at 6.8%-6.9% for FY16, which is slightly lower than the government’s target of 7%.
“Policy rate was slashed to balance with the call money rate, which is falling rapidly due to excess liquidity in the market,” he said explaining the lowering policy rate.
The inter-bank call money rate saw drastic fall of 3.69% in December from 5.79% in June last year, according to the BB data.
Echoing the governor, BB chief economist Biru Paksha Paul said move to lower policy rate was an attempt to dampen other interest rates in the market to stimulate investment.
In the latest MPS, the inflation target has been set at 6.07% from 6.20%. “The falling global fuel and commodity prices have helped ease inflation in the country,” said the chief economist.
Terming 2016—the year of growth and investment, the governor said,“We need to row harder for the same level of growth. We, therefore, need to upgrade the export performance through higher productivity, investment and diversification.”
“But this may not be enough. We can and should add another strength engine to the export-led growth model. That is our domestic demand. Our growth will then be even more robust, fuelled by the two engines—export and domestic demand.” In case of productive investment, he said: “We should not give privilege only the riches but create investment opportunity for the unprivileged people.”
Responding to a question on recent observer appointment in some banks, BB Deputy Governor SK Sur Chowdhury said weak governance has prompted Bangladesh Bank to take the move.
“Irregularities are taking place in the banks, which have forced us to guide them to get rid of those. However, it is true that appointing observer is not the only solution to preventing irregularities.” About the impact of the latest MPS on stock market, he said the new monetary policy is capital market-friendly as lowering credit space will open up opportunity for banks to put funds into stock market.
In reply to a question on capital flight, the governor said the capital machinery import rose significantly at the end of last year, which raises question among many whether money is being siphoned off behind the LC (letter of credit).
“Increased capital machinery import is the reflection of increased investment.”
BB Deputy Governor Abu Hena Mohd Razee Hassan said the central bank has no specific data on the capital flight.
He said the central bank, however, will watch if any evil intention was designed in the name of capital machinery import.
