BB move toward flexible FX regime signals right policy shift: BRAC EPL

Bangladesh Bank's (BB) transition to a more flexible, market-based foreign exchange regime is a step in the right direction, aimed at better aligning the taka with market fundamentals and restoring market confidence, according to a recent report by BRAC EPL Stock Brokerage.

The move, implemented on May 14, ended administrative control over exchange rates and introduced a market reference rate published twice a day based on actual trades.

This is a positive step toward enhancing transparency and price discovery, though successful execution will depend on liquidity and clear guidance, according to analyst comments in the report.

Under the new regime, the interbank taka-dollar rate stabilised at 122.77 by June, with depreciation moderating to 3.89 percent in FY25 from 8.17 percent in FY24.

Interbank spot trading volumes surged ninefold since April, signalling growing confidence among market players.

Despite liberalisation, BB retains the mandate to intervene to stem excessive volatility and has already established a $500 million intervention window to stabilise the rate, as per the report.

Reserves under the BPM6—the sixth edition of the Balance of Payments and International Investment Position Manual published by the International Monetary Fund—jumped to $26.7 billion at the end of June, compared to $21.7 billion in FY24, despite BB's net sale of $508 million, mainly to settle government payments for fuel, electricity, and fertiliser imports.

At the same time, Bangladesh recorded a balance of payments surplus of $3.29 billion in FY25, supported by rising remittances, firm export growth, external aid inflows, and modest import expansion.

Remittances hit an all-time high of $30.3 billion in FY25, posting 26.8 percent year-on-year growth, aided by competitive exchange rates, tighter controls on unofficial channels, and greater access to agent banking and mobile financial services.

Export earnings expanded 8.6 percent year-on-year to $48.3 billion, buoyed by robust readymade garment demand alongside higher shipments of leather, footwear, and plastic goods.

Imports grew by a modest 2.4 percent, recovering from an 11.1 percent contraction in FY24, driven largely by intermediate goods for garments and consumption-linked products.

However, weak machinery imports signal subdued investment appetite.

Against this backdrop, analysts expect the flexible rate to strengthen Bangladesh's external competitiveness over the medium term through higher remittance inflows, improved export receipts, and reduced incentive to use unofficial channels.

As economic activity gathers momentum, import demand is likely to firm up, improving the overall trade outlook, they said.

Meanwhile, Bangladesh Bank has opted to maintain its contractionary monetary stance in the first half of FY26 to anchor inflation expectations and preserve macroeconomic stability.

The monetary policy statement kept the policy rate unchanged at 10 percent, the standing lending facility rate at 11.5 percent, while lowering the standing deposit facility rate to 8 percent.

Inflation remains elevated, and the BB has set a target of 6.5 percent for FY26.

Despite fiscal and external headwinds, the central bank projects GDP growth of 5.5 percent in FY26, up from the provisional estimate of 3.97 percent in FY25.

Broad money growth is projected at 8.5 percent and private sector credit at 8 percent for FY26.

BB cautioned that monetary easing would depend on a sustained decline in inflation.

On structural reforms, the report highlights BB's ongoing efforts to clean up the banking sector through asset quality reviews, resolution frameworks, and governance overhauls aimed at reducing non-performing loans.

Since August 2024, the central bank has pursued a disciplined policy mix of tightening, foreign exchange liberalisation, and sectoral reform to curb inflation, stabilise reserves, and revive investor sentiment.