Cenbank may increase policy rate further

The central bank might increase the Repo rate, also known as the policy rate, under the pressure of the International Monetary Fund (IMF).

A decision in this regard is expected to be finalised in the monetary policy meeting scheduled for today, said an official of the Bangladesh Bank. Alongside the policy rate, the meeting will also decide on the crawling peg method to determine the two other crucial tools of the money market – the lending rate and the exchange rate.

The policy-making officer of the central bank, seeking anonymity, said, "The central bank is currently running on Contractionary Monetary Policy. However, the IMF team that visited Bangladesh asked us to emphasise more on controlling inflation and advised us to tighten our monetary policy. Policy rate can be increased in that continuity. However, it will be finalised in the monetary policy meeting tomorrow [today].

"Besides, the central bank will sit with the managing directors of several commercial banks on the same day."

According to the Bangladesh Bureau of Statistics (BBS), the point-to-point inflation in Bangladesh rose slightly to 9.81% in March compared to 9.67% in February. The overall inflation has been above 9% since March 2023. In December 2023, preceding the announcement of the monetary policy for the second half of the financial year in January, inflation stood at 9.41%. However, contrary to expectations, inflation has risen post the monetary policy announcement, rather than decreasing.

The rate at which commercial banks borrow overnight from the central bank is termed the repurchase agreement (repo) rate. A rise in the repo rate increases the borrowing costs for banks. Consequently, this adjustment can lead to an escalation in both the lending rate and deposit rate.

The Bangladesh Bank raised the policy rate by 25 basis points, bringing it to 8% from the previous 7.75%, while unveiling a new monetary policy for the second half (January-June) of FY24. However, at the beginning of 2023, the policy rate was 5.75% but the central bank continuously hiked the policy rate in efforts to manage inflation.

The central bank official further said, "The central bank has currently adopted interest rate based Contractionary Monetary Policy. In this framework, rather than directly manipulating the money supply, the central bank aims to regulate it by adjusting interest rates. Over the past 10 months, the central bank has raised the policy rate multiple times to curtail the money supply in the market. However, despite these efforts, inflation has not decreased as anticipated."

When asked why inflation is not decreasing even after increasing the policy rate, the official said that it is not possible to reduce inflation solely by increasing the policy rate. The official said that addressing inflation requires a multifaceted approach, including refraining from injecting money, maintaining stability in the dollar rate, implementing supply-side interventions, and various other measures.

Earlier in an event in the capital, Bangladesh Bank Governor Abdur Rouf Talukder signalled that the determination of interest rate will move to a fully market-based system soon.

"I think we are very close to a market-based interest rate. So, there will be no more restrictions on interest rates and banks will be at liberty to fix the rates based on supply and demand," he said.

Another senior official of the central bank, on condition of anonymity, said that a new decision may also come regarding transitioning the lending rate to a market-based system. 

In such an event, the method for determining the lending rate, which currently involves adding a margin to the SMART (Six-Month Moving Average Rate of Treasury Bill), which has been running for the last 10 months, may also change, he added.

According to the latest data released by the central bank, banks are presently permitted to offer a maximum lending rate of 13.55%. Previously, this rate was capped at 9%. Subsequently, the central bank gradually permitted an increase in the lending rate, implementing the adjustment plan over time.

Commenting on the introduction of the crawling peg for the exchange rate, the governor remarked during the same program, "We are presently assessing the exchange rate and endeavouring to implement a crawling peg system, which will serve as an interim arrangement as we move towards a fully market-based system."

At the programme, commenting on the introduction of the crawling peg for the exchange rate, the Bangladesh Bank governor said, "We are currently reviewing the exchange rate and working to introduce a crawling peg, which will be an arrangement before we transition fully to a market -based system."

Just two years ago, the value of the dollar stood at Tk85-86. However, due to decreasing reserves and a crisis in the market, the central bank was forced to raise the dollar's price. In November of last year, the central bank, in collaboration with the Association of Bankers, Bangladesh (ABB) and the Bangladesh Foreign Exchange Dealers Association (Bafeda), set the dollar price at Tk111. Subsequently, this price was lowered to Tk110 in two increments. 

In recent months, the central bank has halted further adjustments to the dollar price. Nevertheless, banks are presently purchasing remittance dollars at Tk116-117 and selling them at Tk117-118.

Tonmoy Modak is a Staff Correspondent at The Business Standard who covers banking and financial sector. He can be reached at [email protected]