Monetary policy likely to stabilise forex reserve, contain inflation

The cautionary monetary policy announced by Bangladesh Bank for the second half of the fiscal year 2023-24 (January-June 2024) will help stabilise the macroeconomic condition.

The central bank's strategy of highlighting the need for ensuring sufficient liquidity to nurture growth sectors while trying to rein in inflation is commendable. 

The public sector credit growth target has been set at 27.8% for January-June of FY24, which was realised at 18% against the target of 37.9% in July-December of FY24. 

On the other hand, the private sector credit growth has been set at 10% for January-June of FY24, which was realised 10.2% against the target of 10.9% in July-December FY24.

While increasing public sector borrowing is necessary, care must be taken to avoid crowding out the private sector from domestic liquidity. 

The central bank should explore more options for increasing liquidity for the domestic banking system and private sector credit growth over the next six months. 

Additional measures are needed to increase credit flow to the private sector by an appropriate financial borrowing strategy. 

Focus on enhancing availability of trade credit, use of contingents, factoring etc may be considered as alternatives to reduce foreign exchange stress as well as increase liquidity.  

Bangladesh Bank did a commendable job by extending support to CMSMEs through pre-financing and refinancing schemes.   

Although the increase in repo rate to 8% will likely impact money supply and hence the banking liquidity available for private credit, I believe the policy rate may help control inflation to some extent through reducing money supply. 

I think there is a need for appropriate support for fiscal policy, which can have an equally, if not more prominent, role in reducing inflation.  

I hope that a return to market mechanism and a crawling peg system will help the balance of payment challenges. 

I suggest allowing the foreign exchange market to operate properly with limited interventions within well-structured parameters.

I also hope that the declared MPS will contribute to macroeconomic stability. 

We hope the continued focus on controlling inflation and stabilising the exchange rate in the current monetary policy will bear fruit.