Policy rate hiked by 25 basis points, pvt credit growth target cut to 10%

The Bangladesh Bank raised the policy rate by 25 basis points to 8% from 7.75% as the central bank unveiled a new monetary policy for the second half (January-June) of FY24 on Wednesday (17 January).

Bangladesh Bank Governor Abdur Rouf Talukder announced the contractionary policy stance tightening the money supply to tame inflation.

The central bank also announced to introduction new exchange rate mechanism named the crawling peg.

All monetary targets were downgraded to curb money supply cutting down private sector credit growth to 10% for June from the existing target of 11%.

The central bank has marked global fuel price dynamics amidst instability in the Middle East, prices of essential commodities in the international market, reducing inflation to a tolerable level, maintaining exchange rate stability and enduring issue of non-performing loans as major challenges.

Give utmost effort to control prices of essentials: PM in first meet of new cabinet

The Bangladesh Bank unveiled the policy less than a week after the formation of the new government.

PM Hasina announced her government's main aim is to fight inflation.

The premier asked ministers to make utmost efforts to control the prices of essentials.

Earlier,  Bangladesh Bank spokesperson Mezbaul Haque, while speaking to The Business Standard, said the central bank will continue its contractionary trend to control inflation. 

"I have started working on corporate governance. It will continue in the new year as well. The Bangladesh Bank will take any action for the interest of the depositors because the main task of the Bangladesh Bank is to provide security to depositors."

A senior official of Bangladesh Bank said there were many challenges in the country in 2023. 

He said from the beginning of the current fiscal year 2024, interest rates on bank loans have been market-based, although those were capped at a single rate from April 2020. 

Besides, the policy rate has been increased several times to control inflation.

He also said it is expected that inflation will come down to 6% during the rest of the current fiscal year with the measures being mulled.

Although the central bank governor earlier said they had taken steps to control inflation to 8% by December, the latest data from the Bangladesh Bureau of Statistics shows that inflation stood at 9.41% in the month.

The governor also hoped that inflation would fall to 6% by June 2024.

In the first six months of FY24, a shift was made from a money supply-based monetary policy to an interest rate-based monetary policy; the repo was raised by 50 basis points to 6.5%. 

However, due to not being able to control inflation by increasing the repo, the policy rate has increased several times in the last six months.

Finally, on 27 November, the rate was increased by 50 basis points to 7.75%.

In the monetary policy for the first half of FY24, adopting a contractionary monetary policy stance tightening money flow to the private sector and lowering the private sector credit growth projection to 11% for FY24 from the previous target of 14.1% set for FY23. 

The monetary policy introduced four key reforms, including the implementation of a policy interest rate corridor, a reference interest rate for lending, exchange rate unification, and a revised method of calculating the gross international reserve in accordance with the Balance of Payment and International Investment Position Manual (BPM6).