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Dhaka Tribune

WB highlights challenges in Bangladesh's monetary policy transmission

Despite further tightening of monetary policy in FY24 by the Bangladesh Bank, the report notes a sluggish transmission due to Smart's mechanism

Update : 02 Apr 2024, 07:40 PM

The World Bank's latest report highlights challenges in Bangladesh's monetary policy transmission, attributing hindrances to the Smart lending rate cap imposed by the Bangladesh Bank (BB). 

Implemented in July 2023, the Six-Months Moving Average Rate of Treasury (Smart) bills, replaced the previous fixed lending cap of 9%.

Despite further tightening of monetary policy in FY24 by the Bangladesh Bank, the report notes a sluggish transmission due to Smart's mechanism, particularly its use of a moving average. The repo rate has climbed by 325 basis points since May 2022, reaching 8% by March 2024. Liquidity conditions have significantly tightened owing to unsterilized US dollar sales, tepid deposit growth, and a surge in non-performing loans.

Interbank call money rates rose to 8.7% by March 2024 from 6% a year earlier. The World Bank notes that using treasury bills as reference rates complicates the pass-through process, keeping real policy rates and deposit rates in the negative territory. 

However, the real interest rate on new lending, closely tied to the Smart rate plus the maximum margin interest, has turned positive. These findings highlight the need for careful adjustments in Bangladesh's monetary policy framework to ensure more effective transmission mechanisms.

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