Monetary policy transmission hindered by SMART lending rate cap: World Bank

The central bank of Bangladesh has tightened the monetary policy but its transmission has been hindered by the SMART lending rate cap since it slows pass-through to lending rates due to the use of a moving average, the World Bank said in a report today.  

In July 2023, the Bangladesh Bank (BB) introduced the "Six-Months Moving Average Rate of Treasury bills" (SMART), replacing the 9 percent fixed rate lending cap.

The BB tightened monetary policy further in FY24, but transmission has been dampened by the SMART, said the Washington-based lender in its Bangladesh Development Update.

The repo rate has been cumulatively tightened by 325 basis points since May 2022 to 8 percent by March 2024.

Liquidity conditions in the domestic market have tightened substantially due to unsterilized US dollar sales by the BB, weak deposit growth, and elevated non-performing loans.

The interbank call money rate for overnight bank lending increased to 8.7 percent by March 2024 from 6 percent a year earlier.

"The use of treasury bills for the reference rate, rather than the policy rate, further complicates pass-through," said the World Bank, adding that the real policy rate and deposit rates remain negative.

The real interest rate on new lending at or near the SMART rate plus the maximum margin interest (currently 3 percent above SMART) has turned positive.