BB to keep policy rates high to curb inflation

Bangladesh Bank is going to unveil the monetary policy for the first half of fiscal year 2024-25 tomorrow and is expected to retain its tight monetary stance as its foremost target is to bring down the spiralling inflation.

The monetary authority is likely to keep unchanged the policy rate, a major tool of monetary policy, as it has little scope to raise it, officials of the central bank said, seeking anonymity.

They said that the policy rate or repo rate, which stood at 8.5 percent, has been hiked nine times since May 2022 to tame higher consumer prices.

It comes after Bangladesh's economy found itself in uncharted territory owing to the supply disruptions caused by the Russia-Ukraine war and the lingering impacts of the coronavirus pandemic.

If the rate goes up further, it will adversely impact the GDP (gross domestic product) growth since the lending rate would cross 15 percent, making investments costlier, the officials argued.

The monetary policy committee of the central bank finalised the monetary policy statement (MPS) on July 14, and it was discussed at a meeting of the BB's board of directors yesterday. Governor Abdur Rouf Talukder presided over the meeting.

A source said that the board discussed the ongoing challenges facing the economy, especially higher inflation.

Annual inflation rose to 9.73 percent in 2023-24, the highest since 2011-12, overshooting the government's target of containing it to 7.5 percent, according to the Bangladesh Bureau of Statistics (BBS).

This is the second year in a row that the Consumer Price Index (CPI), a measure of the increase in the prices of a basket of products and services, crossed 9 percent.

This means the monetary policy could do little to lower it although the BB initiated several measures in recent times, albeit belatedly.

The government has set a goal to limit the CPI to 6.5 percent in 2024-25. It fell slightly to 9.69 percent in July from 9.74 percent in the previous month.

The central bank hopes that the tight monetary stance will help attain the government's target.

Both local experts and the International Monetary Fund (IMF) have suggested a hike in the policy rate in the new monetary policy to rein inflation. The IMF has recommended the BB raise the rate by 50 basis points by December.

However, the meeting source said that the monetary policy committee reviewed the recent economic trends and observed that the growing trend of the lending rate is likely to adversely impact investment and GDP growth targets.

Hiking the policy rate is not the only tool to cool inflation, the board members discussed at the meeting. Fiscal initiatives policy and improving the supply side situation are also important.

Recently, Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the policy rate would have to increase to 10 percent.

The central bank's upcoming monetary policy also plans to focus on attaining the GDP growth target set by the government.

The provisional estimates from the BBS indicate that the gross domestic product grew 5.82 percent in FY24. The target was set at 6.5 percent.

The BB has aimed for a 6.75 percent economic expansion in the current fiscal year in line with the government's goal.

Central bankers say the crawling peg system, which is used to fix the exchange rate, will continue in the new fiscal year as the volatility in the foreign exchange market has eased to some extent.

In May, the BB introduced the crawling peg, setting a Tk 117 mid-rate for the US dollar in line with the IMF's advice to make the exchange rate market-based.

BB officials said that the monetary policy will likely be published on the central bank website, moving away from its usual practice.

Generally, the BB unveils the MPS through a press conference. However, the briefing is unlikely to take place this time as a group of journalists have decided to boycott the event in protest of the restriction facing reporters while entering the premises of the central bank headquarters in Dhaka.