Cenbank unlikely to change policy rate for Jul-Dec

The Bangladesh Bank is likely to keep the repo rate, the key interest rate at which banks borrow short-term funds from the central bank, unchanged in its upcoming monetary policy for the first half (July-December) of the fiscal 2024-25 as it thinks that inflation has been under control for the last several months, its officials said.

The interest rate that commercial banks pay when borrowing overnight from the central bank is known as the repurchase agreement (repo) rate. If the repo rate does not increase, it means that the cost for banks to borrow money from the central bank will not rise. As a result, this will prevent a rise in the lending rate at the banks.

Additionally, the mid-rate for the crawling peg exchange rate might remain unchanged at Tk117, according to a review meeting of the committee formed for the monetary policy held today (14 July).

The central bank's acting spokesperson, Saiful Islam, told TBS that the new monetary policy will be approved at the central bank's board meeting on 16 July. It will be announced on 18 July.

The committee, which will be chaired by the central bank governor, will have seven members, including three external experts from academia and the private sector.

A member of the committee present at yesterday's meeting told TBS, "The central bank is currently implementing an interest rate-based contractionary monetary policy. This contractionary stance will be maintained in the upcoming monetary policy announcement. However, we have decided not to increase the policy rate at this time." 

He went on to say, "Our review indicates that the multiple increases in the policy rate have stabilised inflation, which has been fluctuating within a certain range over the past few months. Additionally, the removal of the interest rate cap has significantly increased the lending rate in banks. For these reasons, we do not wish to raise the policy rate right now. Instead, we are keeping the market under observation."

The Bangladesh Bank hiked the policy rate by 50 basis points to 8.5% 8 May in a bid to rein in inflation. In the beginning of October last year, for instance, the Bangladesh Bank increased its key policy rate by 50 basis points to 7.75%. In January this year, the policy rate was again hiked by 25 basis points, reaching 8%. 

At the beginning of 2023, the policy rate was 5.75%. However, the central bank gradually increased the policy rate to control inflation.
In FY24, inflation rose to 9.73%, surpassing the government's original target of 6% and the revised target of 7.5%, according to data by the Bangladesh Bureau of Statistics (BBS). However, inflation eased slightly to 9.72% in June, the final month of the last fiscal year, marking a decrease of 0.17 percentage points from the previous month.

Regarding the decision not to increase the mid-rate of the crawling peg, another committee member said, "According to our calculations, the dollar is now overvalued. Additionally, since the introduction of the crawling peg, the difference between the informal and formal market dollar rates has significantly decreased. For these reasons, we want to keep the mid-rate unchanged in the new monetary policy."

On 8 May, the central bank introduced the crawling peg exchange rate, setting the Crawling Peg Mid Rate at Tk117. This move resulted in an official dollar rate increase of Tk7 in a single day, marking the highest devaluation of the taka in the country's history. Banks have been told that they may purchase and sell dollars freely around the Crawling Peg Mid Rate, although no official band has been specified.

However, the central bank has verbally instructed banks to keep the rate within the range of Tk116-118.

Two years ago, the dollar rate was Tk85-86. However, due to a decrease in reserves and a dollar shortage in the market, the central bank was compelled to increase the dollar rate. In November last year, the central bank set the dollar rate at Tk111 through the Association of Bankers, Bangladesh, and the Bangladesh Foreign Exchange Dealers Association. Subsequently, the rate was reduced twice to Tk110. Then, on 8 May, the crawling peg was introduced.

Currently, banks are purchasing remittance dollars at a rate of Tk118.30-118.50 and selling them at Tk118.75-119.