Cenbank may keep Jan-Jun policy rate unchanged

The Bangladesh Bank is expected to continue its contractionary monetary policy for the second half of the current fiscal year while maintaining the policy rate unchanged at 10%, as the rising inflation rate shows signs of slowing down.

Additionally, there is little chance of any change in the exchange rate as senior central bank officials have indicated that the initial decision is to maintain private sector credit growth at the same level.

The central bank's board is scheduled to approve the new monetary policy for the January-June period this morning, with Governor Ahsan H Mansur announcing it in the afternoon.

BB to announce monetary policy statement Monday

A policy rate is the interest rate that a central bank sets to influence the economy's interest rates and achieve its inflation targets. It's also known as the repurchase agreement (Repo) rate.

Commercial banks are charged the Repo rate for borrowing money overnight from the central bank. If the Repo rate increases, the cost of borrowing for banks rises, leading to higher lending and deposit rates.

However, as the central bank will not raise the repo rate, banks and customers will not face additional interest burdens. Currently, banks offer a maximum of 11% for deposits and 14% for loans.

A senior central bank official, speaking on the condition of anonymity, told The Business Standard, "We were monitoring the inflation rate for January to determine whether to increase the policy rate. Since the inflation rate fell below 10% in January and our current policy rate is 10%, which is slightly above inflation, we recommend keeping the policy rate unchanged."

The decrease in food inflation contributed to an overall reduction in general inflation, which fell to 9.94% in January, down from 10.89% in December. This marks the first time in three months that inflation has returned to a single-digit rate. The last time inflation was below 10% was in September 2024, when it stood at 9.92%. The overall inflation has been above 9% since March 2023.

Fahmida Khatun, executive director at Centre for Policy Dialogue and member of the central bank's board of directors, told TBS, "The policy rate was increased several times in the first half of the current fiscal year, but there is no need to raise it further at present."

Regarding why inflation has not decreased despite the rate hikes, she explained that it takes about a year to affect the economy after changes in the policy rate.

"Therefore, observation is needed. Additionally, reducing inflation requires more than just increasing the policy rate; stability in the dollar rate, supply-side interventions, and other measures are also necessary," the economist pointed out.

According to the central bank, the policy rate was increased by 2.25 percentage points to 7.75% from the beginning of 2024, with two hikes in the first half of the year.

When the interim government took office in August 2024, the policy rate was 8.50%, and it was raised in three steps to 10% by October.

"We will need to wait until at least next June-July to fully assess the impact of these rate hikes. While inflation has been declining for the last two months, its sustainability remains uncertain," said Fahmida Khatun.

She noted that in many countries, it takes at least a year to reduce the policy rate after an increase. The US central bank, for example, took more than a year before lowering its policy rate. Therefore, any decision to reduce the policy rate will depend on inflation reaching a tolerable level.

Governor Mansur has previously stated that the target is to reduce inflation to 6-7% by June-July.

A senior central bank official revealed that the new monetary policy has maintained the same private sector credit growth target as before, set at 9.8% for the July-December FY25 period.

However, actual private sector credit growth was just 7.24% in December, the lowest in 11 years.

Fahmida Khatun believes it will be impossible to achieve the credit growth target in the next six months, as investors are reluctant to make new investments under the current conditions.

She doubts the situation will change before the next election, as investors seek long-term stability. Consequently, the credit growth target seems unrealistic.

There is little expectation of new guidelines on the exchange rate in the new monetary policy. Currently, the central bank has instructed banks to keep the dollar rate at Tk122 through verbal instructions. However, banks are reportedly buying remittance dollars at a higher rate of Tk122.50.