One of the reasons behind the ongoing inflationary bubble in recent months is the excess liquidity in the banking system, which was dispersed during the Covid-19 period as stimulus packages.
The observation came in the latest Bangladesh Bank annual report for the last 2020-21 fiscal year.
"Excess liquidity stemming from the stimulus packages may engender inflationary trends more in the upcoming months where strong vigilance will be required,” Bangladesh Bank has further warned.
“The latest Bangladesh Bank observations may come against the backdrop of a rising trend in inflation in recent months mainly due to higher prices of food items along with other essentials,” AB Mirza Azizul Islam, economist and former finance adviser to the caretaker government said.
“Excess liquidity and expansionary monetary policy coupled with the implementation of the government stimulus packages pushed up liquidity in the banking system which may enhance the inflationary bubble more,” he added.
The excess liquidity in the country's banking sector went towards an upward trend since April 2021 following lower private-sector credit growth mainly due to the second wave of the Covid-19 pandemic.
The central bank has already announced its expansionary monetary policy stance (MPS) for FY'22 to help make the recovery of the pandemic-hit economy of Bangladesh faster.
"The stance is essentially expansionary and accommodative for all growth-supportive needs while ensuring inflation target as well," the annual report notes.
The prime objectives of the MPS are to support investment and employment-generating activities and create enabling conditions for the businesses to normalize production and supply chains, according to the report released Monday.
The MPS undertakes a strategy to provide adequate financial support to the priority sectors and to ensure required funds in the system through various policy options.
"Despite repeated waves of the Covid-19, Bangladesh’s economy has managed to return to the recovery phase aided by appropriate policies and 28 stimulus packages," it explains.
According to the central bank's latest statistics, surplus liquidity came down to Tk2,115.06 billion in January 2022 from Tk2,167.29 billion a month ago. It was Tk2,314.63 billion in June 2021.
On the other hand, the overall excess liquidity with the scheduled banks dropped slightly in January 2022 as trade financing increased significantly following higher prices of essentials, including fuels, on the global market along with the reopening of both local and global economies.
Meanwhile, by official count, the inflation as measured by the consumer price index (CPI) rose to 6.17% in February 2022 from 5.86% a month before on a point-to-point basis while the inflation reached 5.69% from 5.62% on a 12-month average.
However, the government has set the target average inflation rate for FY'22 at 5.3%.
