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H1 Monetary policy statement: Bangladesh Bank sets ‘cautious, restrained’ outlook till December

  • Published at 11:32 pm July 31st, 2018
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Representatives of Bangladesh Bank unveil its new half-yearly monetary policy statement on Tuesday Mehedi Hasan/Dhaka Tribune

Bangladesh Bank’s new monetary policy statement (MPS) anticipates a spike in the circulation of money in the market, which could push up inflation and see increases in money laundering

The central bank’s announcement on Tuesday of a cautious half-yearly monetary policy statement aimed at curbing inflation has met with approval from the country’s premier bourse.

Bangladesh Bank’s new monetary policy statement (MPS) anticipates a spike in the circulation of money in the market, which could push up inflation and see increases in money laundering.

The Dhaka Stock Exchange (DSE) in an immediate reaction to the new policy statement welcomed it, saying it would buoy up stock market operations.

The MPS for the first half year (H1) of the current fiscal year 2018-19 (FY19) comes just months ahead of the coming general election scheduled for December.

The central bank said the MPS was intended to provide required support to attain targeted GDP growth and restrain inflation.

In his announcement of the MPS yesterday, Bangladesh Bank Governor Fazle Kabir said: “We have to pursue the MPS with a cautionary outlook focusing on GDP growth and restrained inflation.”

The MPS set the internal credit growth target at 15.9 % in 2018-19 against a growth rate of 14.6% in fiscal 2017-18.

Credit growth was targeted to be 10.4% for the public sector and 16.8% for the private sector.

“But there will be room to accommodate further rises in private credit growth as public sector credit demand is lower,” the central bank governor said.

In the MPS, the central bank supported bank owners’ move to set single digit interest rates for bank loans, but said the large volume of default loans remained the main obstacle to achieving sustainability.

According to Fazle Kabir, the growth in the broad money circulation was estimated to be 12%, in contrast to last year’s single digit growth.

Making a call to the National Board of Revenue (NBR) and Commerce Ministry to enhance their monitoring to check the import of luxury and unnecessary items, the Bangladesh Bank governor said intense monitoring was required to ensure that private sector credit be utilized for productive sectors and employment generating purposes.

He also laid emphasis on putting a priority on increasing foreign direct investment (FDI), portfolio investment in the capital market, and the enhancement of remittance inflows from expatriate Bangladeshis.

“It will be an important to attract more local and foreign equity investment for the mega projects by reducing their dependence on foreign loans,” he said, adding that this would ease Bangladesh’s balance of payments.

Defending Bangladesh Bank’s move in April to reduce the cash reserve requirement (CRR) of banks by 1% to 5.5% and Repo rate by 0.75% to 6%, he said these efforts had played a good role in easing the liquidity crisis in the banking sector.

He also supported the private bank owners’ initiative to adopt a single digit interest rate. The central bank governor said they were entitled to make this decision a part of market mechanism.

But he said a number of reforms need to be implemented to sustain single-digit interest rates.

Otherwise, the demand-supply based market dynamism in loans and deposits would be impeded. That would be detrimental to long term foreign and local investment, he observed.

About the achievement of the last MPS, Fazle Kabir said the country achieved 7.65% GDP growth surpassing the target of 7.4% while the inflation rose by 0.34% to 5.78% against the target of 5.5%.

Governor sees no mismatch in vault gold

Responding to another question, the central bank governor also ruled out any possibility of a change in the quality or quantity of gold deposited in the central bank’s vault.

“It’s quite impossible to adulterate the gold preserved in Bangladesh Bank vault as there is lots of security,” he said.

This was the first reaction from the central bank governor following the report of a mismatch in the quality and quantity of gold preserved with Bangladesh Bank vault by the NBR.

“We have a six-level security system with 42 CCTV cameras installed in the vault,” said Fazle Kabir, adding that there was no scope at all to adulterate anything.

Earlier, Finance Minister AMA Muhith had said that there was 963kg of gold deposited with the central bank and only 3kg was contaminated.