To tame the ongoing inflationary pressure, Bangladesh Bank lifted the lending interest rate cap on Sunday while raising the policy interest rate. It also decided not to sell the US dollars below the market price.
Although the central bank had decided to follow the IMFs Balance of Payments and International Investment Position Manual (BPM6) for calculating the Gross International Reserve (GIR), it doesn't want to disclose the Net International Reserve (NIR) publicly.
Moreover, shifting away from the earlier monetary targeting approach, the new economic policy was set to an interest rate targeting the framework by following contractionary monetary policy.
Bangladesh Bank Governor Abdur Rouf Talukder made the announcement of the Monetary Policy Statement (MPS) for the first six months of the upcoming fiscal year (FY24) on Sunday.
During the press briefing, he said: “Bangladesh Bank shifted from the earlier monetary targeting approach with the new monetary policy set to an interest rate targeting framework. It is a structural change.”
“In the new monetary policy, the policy interest rate is increased to reduce the money supply in a way so that the government reduces borrowing from the banks. The 9% cap on loan interest has also been lifted,” he added.
In line with the International Monetary Fund's (IMF) 6th edition of the Balance of Payment and International Investment Position Manual (BPM6), the central bank will calculate and publish the gross international reserve. The governor also said: “No central bank in the world publishes the Net International Reserves (NIR). We are also not bound to disclose NIR.”
Mixed reactions
Economists and businesses expressed satisfaction with the new monetary policy announced by Bangladesh Bank. However, they do not think that it will not help to reduce inflation quickly enough.
Ahsan H Mansur, executive director Policy Research Institute of Bangladesh (PRI) told Dhaka Tribune: "Their objective is correct. However, doubts remain as to how much of it can be implemented. Moreover, it is not that inflation will come down very quickly as a result of this new MPS. The strategy seems a bit time-consuming to me.”
The former IMF economist also said: "If they influence the treasury bill now, it will no longer be market-based. Moreover, there is also some hide and seek about the net reserve. I think they do not want to tell the net reserve to the public even if they may disclose it to the IMF.”
President of Dhaka Chamber of Commerce & Industry (DCCI) Barrister Md Sameer Sattar said: "A contractionary MPS will help to revive the financial and private sectors. The MPS primarily aims to curb inflation by reducing the aggregate demand in the economy, continuing supply-side interventions and a stable and favourable business environment. The repo and reverse repo have been adjusted to 6.5% and 4.5% respectively to control inflation by reducing the money supply.”
“However, the effectiveness of these instruments of controlling inflation is yet to be seen. Because reverse repo was raised earlier but inflation did not decline as expected,” he added.
What's in the MPS
In the beginning, the Chief Economist of Bangladesh Bank Md Habibur Rahman presented the keynote of the new MPS.
In his presentation, he said: “At first, Bangladesh Bank will transition from a monetary targeting framework to an interest rate targeting framework. The target policy interest rate, set at 6.50%, will be accompanied by a ±200 basis points symmetric corridor consisting of a standing lending facility (SLF) rate at 8.5% and a standing deposit facility (SDF) rate at 4.5%. Under this new framework, the interbank call money rate will closely align with the policy rate, ensuring stability."
Conforming to the tight monetary policy stance, the central bank decided to increase the policy rates.
The policy rate, or repo rate is adjusted upward by 50 basis points from 6% to 6.5% while the SDF rate, previously known as reverse repo rate, is adjusted upward by 25 basis points from 4.25% to 4.5%, effective from July 1, 2023.
This measure aims to raise the cost of borrowing, which is expected to have a limiting impact on consumer price index (CPI) inflation.
Secondly, the central bank intends to introduce a market-driven reference lending rate for all types of bank loans, replacing the previously imposed lending rate cap, Rahman also said.
This move aims to enhance competitiveness in the banking sector and foster a favourable lending environment for businesses and individuals.
The reference lending rate, known as the 'Smart' (six-month moving average rate of treasury bills), will be announced monthly through the Bangladesh Bank website with a margin applied for banks and non-bank financial institutions (NBFIs).
In practice, “Smart” and a margin of up to 3% will be applicable for banks and “Smart” and a margin of up to 5% will be applicable for NBFIs.
However, the lending activities for CMSMEs and consumer loans may be subject to an additional fee of up to 1% to cover supervision costs and there will be no changes in the interest rates applicable to credit card loans.
Uniform dollar rate
Bangladesh Bank will now adopt a unified and market-driven single exchange rate regime, allowing the exchange rate between Taka and USD or any other foreign currency to be determined by market forces.
The central bank will no longer quote specific rates for buying or selling foreign exchanges, promoting stability in the foreign exchange market.
Lastly, Bangladesh Bank will calculate and publish gross international reserves (GIR) in line with the sixth edition of the IMF's Balance of Payments and International Investment Position Manual (BPM6) while keeping track of current practices of calculating and reporting total foreign assets, the new monetary policy notes.
