Lending rates likely to go up

The central bank is mulling an increase in lending rates as interest rates on deposits have kept rising amid soaring inflation.

In a meeting with the representatives of four state-run commercial banks on Wednesday, the Bangladesh Bank discussed the matter, meeting participants told The Business Standard. 

Bangladesh Bank Deputy Governor Farah Nasser, Sonali Bank Managing Director Md Afzal Karim, Agrani Bank Managing Director Md Murshedul Kabir, Rupali Bank Managing Director Mohammad Jahangir and Janata Bank Managing Director Abdus Salam Azad were present, among others, at the event. 

"The costs of everything including that for collecting bank deposits have surged because of the excessive inflation in the country. The repo rate [the interest rate at which the central bank lends money to banks] and interbank rate have also been increased. Now, banks are in trouble as there is no increase in interest rates on loans," a participant, wishing to remain unnamed, said.

"The Bangladesh Bank has sat down with us to review the lending rates. The governor is out of the country now, therefore no policy decision has been made in this regard," he added.

According to the central bank's policy, interest rates on deposits of a three-month term or above must be higher than the average inflation of the previous three months. 

In June 2021, when the central bank capped the lending rates at 9%, deposit rates were above 5.64% – the average inflation. Interest rate spread – lending rate minus deposit rate – was okay then. 

As inflation continued to rise and reached 9.1% in September – meaning that deposit rates, as per the policy, should now cross the lending rate which is not possible in reality –  the central bank moves for the lending rate rise. 

Bankers and economists earlier repeatedly called for an increase in lending rates saying that low-interest rates on bank loans intensified the inflationary pressure. The central bank did not pay heed to them for long. 

Meanwhile, the Bangladesh Bank late last month increased the repo rate by 25 basis points, in a bid to reduce the flow of money. The money flow, however, does not fall because of the static lending rates. 

Moreover, credits to the private sector have been on the rise over the last five months and the growth reached 14.07% in August – the highest in four years.  

To curb money supply as well as inflation, neighbouring India has followed a slightly different way. It increased the repo rate by 50 basis points in late September. Immediately after the rise,  State Bank of India, Bank of India, and HDFC, have hiked their external benchmark lending rate.

The lending rate hike, however, did not happen in the case of Bangladesh, as the rates here are determined directly by the central bank. 

Most countries in the world have tightened their monetary policies as a strategy to reduce the money supply for controlling inflation. The Bangladesh Bank in this year's monetary policy also followed the same.