The bank's key interest rate, or policy rate, has already been increased three times, but this hasn't had any positive effects on containing inflation. Finally, the central bank is considering removing the 31-month-old interest rate ceiling.
The Association of Bankers Bangladesh, a forum for managing directors of banks, reportedly received the decision from Bangladesh Bank around two weeks ago, but no official circular has yet been issued.
However, given that it is already late, economists believe it is crucial to issue a formal notification in this regard.
A central bank official and a bank CEO informed this while requesting anonymity.
Officials of the central bank also said that a circular will be sent out to banks if required.
An International Monetary Fund (IMF) mission recently recommended that the Bangladesh Bank should withdraw the interest rate cap on lending and savings.
A recent Bangladesh Bank study also recommended that the lending interest rate cap be removed, noting that the market-based system could be a suitable answer for efficient monetary policy, containing inflationary pressure, and resolving the current imbalance between credit demand and supply.
The idea to raise the current interest rate cap - 9% on lending and 6% on deposits - has already drawn opposition from business leaders, who have also advocated for improving bank efficiency to lower inflation.
Inflation and interest rate
An interest rate cap of 9% on the lending rate was declared in April 2020 when the country's inflation rate was 5.96%.
Now it's been 31 months but it is still in there when inflation hit a 10-year high.
According to the source, this time Bangladesh Bank has decided to raise the interest rate on consumer loans to 12% from 9% to contain inflation.
Despite the central bank hiking the key interest rate, commonly known as policy rates, three times since May 29 of this year, the lending interest ceiling has been a significant obstacle to reducing higher inflation.
According to economists, this is because the money supply did not decrease significantly as a result of the ceiling. Analysts believe that a rise in interest rates will produce a decrease in the money supply, which will assist in reducing inflation.
But still, the scheduled banks' weighted average interest rate is lower than the three monthly average inflation rates.
Data analysis shows that in Q1 (July-September) of FY23, the inflation average surged 8.7%.
Though it's been on a rising trend since last year, it hit a 10-year high of 9.52% in August. In September it was 9.10% and in July the general inflation rate was 7.48%.
According to the Bangladesh Bank's latest data, in July and August, the scheduled banks' weighted average deposit rate was only 4.04% and 4.07%.
On the other hand, the Advance rate was 7.09% and 7.11% respectively.
However, in banking terms, an advance is a sum of money or credit provided by a bank or a financial institute to any business establishment or individual for short-term requirements.
Advances are given to the borrower as working capital.
Economist call for official circular
Zahid Hussain, lead economist consultant for the World Bank told Dhaka Tribune that, certain measures are still not being taken by the policymakers.
“Inflation is increasing and no decision has yet been made on the interest rate, although it can be heard that a decision in this regard is coming soon, it is already too late,” he said.
He also added that the central bank should issue a circular to ensure transparency to this end, as verbal instruction is not expected given the gravity of the issue.
“Taming inflation is still the main challenge for policymakers in order to reduce the impact of the upcoming recession on Bangladesh and if they fail to do it properly, we will have a severe effect due to the recession,” he warned.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh told Dhaka Tribune: “Besides, the monetary policy is still not used properly by our policymakers. Although it is heard that the lending rate may be lifted, it should have been done much earlier.”
The former IMF economist also informed that: “So far I have understood that the new rule will not be applicable for the consumer loans that have already been given out. In addition, the new interest rate will not apply to mortgages or home loans.”
Business leaders oppose interest rate rise
On Saturday (November 5) at an event of the Federation of Bangladesh Chamber of Commerce and Industry (FBCCI), its President Md Jashim Uddin opposed any move of increasing the interest rate of lending.
He said, if banks can reduce their cost of funds, there will be no need to raise interest rates on loans.
And if the government increases subsidies on gas and ensures uninterrupted supply, industrial production will increase and consequently, inflation will also decrease.
He added that even if the interest rate on deposits increases, it is possible to give loans at 9% interest by increasing the banks' efficiency. This will be possible only if the banks can reduce their expenditure by 2-3%.
“The way banks in Bangladesh spend Tk2-3 crore to set up lavish branch offices is not seen in any other country in the world, including China,” he also said.
