Bangladesh Bank has set a target to reduce bank interest rate spread during January-June period of the current fiscal year, aimed at spurring the capital market of the country.
The target was set at the central bank’s monetary policy announced Thursday for the second half of the fiscal year (FY) 2014-15.
The policy was adopted to bring down the inflation rate to 6.5% from current 6.99% (12-month average) and achieve an economic growth within a range between 6.5% and 6.8%.
“I hope that our monetary policy issued today will play the same effective role as the previous issues in instilling and strengthening public confidence on Bangladesh Bank’s actions aimed at containing and stabilising CPI inflation,” Governor Dr Atiur Rahman said, releasing the Monetary Policy Stance (MPS) at Bangladesh Bank headquarters in Dhaka.
“I also believe that its attendant inclusive, environmental sustainability supportive credit and financial policies will make meaningful contribution in supporting the government’s pursuit of inclusive, environmentally sustainable growth and poverty eradication on the country’s path towards prosperity.”
Atiur said Bangladesh Bank’s attention in support of capital market stability will continue in seccond half of FY2014-15.
He said the central bank has the statutory responsibility of enforcing compliance of banks with the legal limits on their capital market exposures; but further to this, Bangladesh Bank has continued liquidity support for capital market transactions in volumes permissible within Bangladesh Bank’s monetary programs.
In the first half of this fiscal year, he said Bangladesh Bank has introduced a number of new investor-friendly regulatory reforms facilitating external transactions of foreign and local businesses including investors in the capital market.
Atiur said deposit and lending interest rates of banks and financial institutions have been coming down in line with decline in CPI inflation; intermediation spreads between weighted average deposit and lending interest rates of banks and financial institutions have come down to five percent or lower in the state owned banks and the majority of private sector banks.
The spreads are higher in the foreign banks and in some private sector banks with high engagement in riskier small enterprise lending, he said.
“Bangladesh Bank’s attention towards rationalization of these higher spreads will continue.”
The governor said competitive lending interest setting behavior not having yet fostered well in the local financial market.
Bangladesh Bank resorted to setting ceilings on lending interest rates in two priority areas – pre-shipment export credit and agricultural credit.
In the context of general declining trend in interest rates, in H1 FY2014-15 Bangladesh Bank has revised the lending rate ceiling for agriculture downward from 13% to 11%. Competitive rate setting behavior in the market would have rendered prescription of such ceilings unnecessary.
“Bangladesh Bank will therefore pursue ways of fostering of competitive price setting, rate setting attitudes and practices in our financial markets.”
