Policy rate hiked again amid high inflation

Infographic: TBS

As inflation remains stubbornly high near double digits, the Bangladesh Bank today raised its policy rate once again in less than a month, pushing it to 10% to make money costlier further.

This is the fifth hike this year and 11th since May 2022 when the policy rate — a key monetary tool to keep the money supply in check — was 5%. Earlier on 24 September, it rose from 9% to 9.5%.

Despite frequent rate hikes, inflation remains elevated at 9.92% in September, slightly down from the month before, as consumer prices in Bangladesh are driven largely by internal factors and supply-side challenges.

Experts say that while the latest hike can help cool inflation by reducing demand, Bangladesh's inflation problem is not primarily demand-driven.

"Monetary policy can only do that much," one analyst said. "What we see in Bangladesh is inflation is being exacerbated by supply disruptions and structural weaknesses."

Infographic: TBS

In this context, experts argue that fiscal policy must play a bigger role in keeping inflation in check. They call for targeted government spending, improved supply-side infrastructure and better fiscal discipline to ease inflationary pressures.

Zahid Hussain, former lead economist of the World Bank's Dhaka office, appreciated the latest rate hike.

Asked whether a further hike was needed, he said it was hinted at before. "The central bank did what it announced earlier. Further rate hikes are unlikely in the next two or three months," he told TBS.

It now remains to be seen how it impacts the economy before taking the next decision, he added.

"Monetary tightening alone won't be enough, we need coordinated fiscal measures to address these deeper, structural issues if inflation is to come under control sustainably," he added.

According to bankers, rate hikes immediately impact the market in developed economies where retailers dominate the loan market, whereas retail loans account for only 7-8% in Bangladesh.

"Most of our loans are given to the corporate sector, which is why it takes time to feel the impact of rate hikes," Zahid said.

He suggested that a slight appreciation of the taka might ease the exchange rate pressure on inflation to some extent since the dollar rate seems stuck at Tk120 in the interbank market.

Market monitoring at the retail level is a must to tame inflation, said the economist, stressing the need for creating a credible updated database of the supply and demand of commodities, and making those public. This will help check market manipulation by a section of traders.

Typical market policing in the retail sector won't help, policing is needed against extortion, he added.

Will it impact the lending rate?

Bankers have not seen much impact on lending rates from the central bank's latest rate hike.

Mohammad Ali, managing director & CEO of Pubali Bank, told TBS that they did not raise lending rates after the previous two policy rate hikes fearing that any rise in interest rates would put businesses in trouble given the declining trend. This may give rise to default loans.

Instead, his bank is offering reduced rates for deposits to cope with the policy rate hikes.

The senior banker said a higher policy rate will discourage banks from borrowing through Repo.

A similar response came from Sohail RK Hussain, managing director of Bank Asia, who did not see any immediate impact on the overall interest rates as credit growth remains significantly low.

"Lending rate may go up if credit demand rises in the next few months," he said.

However, corporate borrowers seemed worried as they said lending rates have already gone up after the policy rate was hiked by two percentage points this year alone. Further rise will make loan repayment difficult and create more non-performing loans, they warned.

"If any corporate group has Tk1000 crore in loan, its interest payment would go up by Tk10 crore per year only from a 1% rise in lending rate. As almost all sectors are facing a slump, a fresh rise in lending rates would make businesses even worse," said a leading businessman, wishing not to be named.

Economist Zahid Hussain held a different view, saying lending rate is not the sole issue for businesspeople.

"We did not see that much investment when the lending rate was capped at 9% for long… Again, a good growth in investment was seen when lending rates were much higher," he said.

Economic uncertainty, bureaucratic hassles, delays in getting registrations, and overall investment climate are factors that impact businesses the most. The interim government needs to work on improving these indexes for doing business, he added.