Contractionary monetary policy on the cards

Bangladesh Bank is preparing a contractionary monetary policy statement (MPS) for the second half of the current fiscal year to control the supply of credits and inflation in a bid to maintain economic stability, according to officials. The new monetary policy is expected to ensure price stability, and gain public trust in currency. Monetary policy plays a vital role in controlling the supply of money, often by setting up a target of inflation rate or interest rate, they said. Bangladesh Bank Governor Fazle Kabir is likely to announce the MPS late this month. Abul Kalam Azad, general manager and deputy spokesman at the central bank, told the Dhaka Tribune: “We have yet to finalize the date of MPS announcement. It could, however, be announced on January 29 or 31.” He added that they had taken all necessary preparations to announce the MPS. The bank has already finalized the MPS, and it is now being reviewed by the government authorities concerned, according to sources. Bangladesh Bank officials said proposals and suggestions from eminent economists and the bank’s officials would be incorporated in the MPS. In the draft MPS, Bangladesh Bank has given special focus on ensuring the quality of credits and keeping inflation at a reasonable level, they added. With the MPS being a contractionary policy, the officials claimed that it would be a growth-supportive measure. Economic growth will not be hampered as orders to reduce credit disbursement and strengthen the monitoring and supervision of loans will be imposed according to the central bank’s directives, they added. The growth in credit flow to the private sector was projected to rise to 16.2% by December 2017 and 16.3% by July this year. However, it rose to 19.06% by November 2017, according to Bangladesh Bank data. On the other hand, the projected inflation rate set by the government and the central bank is 5.5% for FY2017-18, but it stood at 5.70% on a 12-month-average basis in December 2017 due mainly to the rising food prices. As a part of announcing the MPS, Bangladesh Bank has already hinted at taking some steps such as discouraging credit supply to less productive sectors. There may be an announcement from the bank for lowering consumer financing to bring down the inflation rates by the end of the current fiscal year. The MPS will focus on disbursement of more SME and agricultural loans and microcredit to create employment opportunities across the country, said a Bangladesh Bank official. The central bank is also likely to announce that the limit to advances-deposit ratio (ADR) might be slashed in order to keep the private sector’s credit growth rates within the stipulated limit. The ADR limit will likely come down to 85% for sharia-compliant Islamic banks from the existing 90%, and for the rest of the banks, it will come down to 80% from 85%.