Bangladesh Bank on Sunday again raised the repo rate by 50 basis points to 7.75%, in an attempt to contain inflation by making money costlier.
After this hike, the repo rate will be effective from Monday.
The repo rate is the rate at which the Bangladesh Bank lends money to commercial banks or financial institutions.
In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
Additionally, there will be a rise in the interest rate on bank loans and deposits.
With this decision, the policy rate has been increased for the seventh time since May last year.
Last on October 5, BB increased its policy rate, also known as repo rate, by 75 basis points to 7.25%.
Earlier, On May 29 2022, the repo rate was set at 5%, 5.50% on June 30, 5.75% on September 29, 6% on January 15 earlier this year, and 6.50% on July 1.
The central bank's new Monetary Policy Committee (MPC) has set a target to reduce inflation to 8% in December and 6% by June next year.
Regarding the repo rate hike to fight inflation, Zahid Hussain, chief economist consultant at the World Bank had earlier said: “Raising the repo rate is not enough to control inflation. The argument behind the move is that the current inflation is mainly due to supply shock. We are addressing the supply side through import substitution. That is why the central bank has introduced refinance schemes in several sectors including agriculture and SME sectors as import support.”
Additionally, the inflation rate has increased due to the central bank's monetization of it for lending to the government. Even monetization and refinancing plans are no longer effective ways to curb inflation, he also said.
“Once more, raising the interest rate on consumer loans while appropriate is insufficient. The interest rate floor on deposits has been raised by monetary policy, and this could help deposit growth,” Hussain added.
Bankers and economists also said to Dhaka Tribune that when banks borrow at 7.75% from the Bangladesh Bank, they will quote a higher rate for treasury bills which is linked with the lending rate.
The rise in the policy rate will surge the deposit rate also, they feared.
On the other hand, this latest hike in the policy rate will increase borrowing costs for commercial banks from the central bank which will eventually push the lending rate up.
When the lending rate goes up, it will make money costlier for consumers reducing credit demand which will ultimately ease price pressure.
However, in addition to the policy rate, the Bangladesh Bank has also raised the Six Months Moving Average Rate of Treasury Bill (Smart) rate by 25 basis points to 3.75%.
Consequently, borrowers will now have to pay an 11.18% interest rate on loans from commercial banks.
All these decisions were made at the first meeting of the newly formed monetary policy committee on November 22.
According to an IMF study that looked at how changes in policy rates affect inflation in some central Asian economies, it suggested 1 percentage point increase in the policy rate results in 0.5 percentage point in inflation and 1 percentage point exchange rate appreciation results in a 0.3 percentage point decrease in inflation in the first year.
Bankers say that increasing the policy interest rate will increase the bank deposit rate, which will increase bank deposits.
But businesses are worried because this decision will also increase the borrowing rate.
As a result, the cost of doing business will also increase, which may affect the price of goods.
