Is this monetary policy growth supportive?

Bangladesh Bank recently announced its monetary policy for the fiscal year 2016. As always, the announcement has sparked a number of criticisms. The main allegation canters on economic growth since growth is the main driver to increase employment. Some economists view this monetary policy as cautious but growth supportive, while others attempt to brand this policy as conservative enough to stifle growth. We also believe that any opportunity for growth must be cultivated to the fullest extent. But the second camp goes as far as to argue that the country should embrace even high inflation for the sake of growth. Some claim that even a slightly high inflation, say 8 percent, is good for investors' incentives.

The argument of inflation indulgence seems desperate and defiant of consumers' sufferings. We should not forget that consumers represent 70 percent to 80 percent of the GDP in a developing economy. Inflation control is the prime job of a central bank and any negligence on this part would be detrimental to growth because high inflation will erode consumption and dampen growth.  

Inflation can be compared with blood pressure which has a standard measure for the well functioning and improvement of the body. No matter how high or low one's blood pressure, both are bad for health. If a person wants to improve his health by eating a lot of carb, fat and sugar, his cholesterol will most likely rise along with his blood pressure, which may lead to a heart attack. Then the whole pursuit of improving one's health goes in vain. Adequate food with necessary exercises is needed to maintain balance between body weight and blood pressure. In the same way, a central bank's main job is to maintain a moderate level of inflation pressure while continuing endeavours to maximize growth. 

Bangladesh Bank's policy stance to not reduce policy rates, such as repo and reverse repo rates, has come under criticism when inflation remains moderate at 6.4 percent now. Although general inflation has fallen from 7.25 percent in August 2014 to 6.4 percent in June 2015, core inflation has been on the rise since then. Non-food and non-fuel core inflation is a variable that a central bank must seriously take into account because the bank is primarily held responsible for this part of inflation. Food inflation may go up because of a drought, and unfortunately, Bangladesh Bank has no command over rainfall. Fuel inflation may trigger owing to wars or geopolitical tensions, and Bangladesh Bank does not have any control over Middle-East politics. 

The recent fall in general inflation directly came from the food part and indirectly from the fuel part. But core point-to-point inflation has risen from 5.75 percent in August 2014 to 6.74 percent in June 2015. Hence, it has been prudent of Bangladesh Bank to remain vigilant on core inflation and to keep policy rates unchanged. If core inflation keeps on falling in a convincing manner, lowering policy rates would soon be warranted. Thus, the monetary policy keeps room for changes based on needs.

In addition, the policy rate is not the only weapon in Bangladesh Bank's arsenal. Money supply is another effective tool where Bangladesh Bank has remained adequately obliging to accommodate private credit growth which is sufficient to support 7 percent output growth that the regime targets. The growth target of private credit at 15 percent seems adequate to achieve 7 percent GDP growth. India engineered more than 8 percent output growth with 15 percent private credit growth in the recent past. Our economy registered 6.5 percent output growth with private credit growth at 13.6 percent over the last fiscal year. Although the relationship between private credit growth and output growth is not mechanical or linear, we get some idea from evidence and also from other comparable economies. 

The latest monetary policy has apparently been accommodative, but we should not ignore its inherent expansionary nature with other qualitative aspects such as selective easing and financial inclusion. Given the government targets 7 percent growth and 6.2 percent inflation, the core math requires 13.634 percent money growth [=(1.07x1.062)-1]. But Bangladesh Bank is adding another 2 percentage points, easing space on top of that core requirement. The World Bank and Bangladesh Bank are going to develop a joint fund of $500 million which will act as another injection of quality credit. Foreign borrowings will remain open for quality companies as before, easing more funds in commercial banks for disbursement toward projects of small and medium enterprises and women entrepreneurships. Bangladesh Bank is trying to make private investments as dynamic as possible. Of late, interest rates of banks have begun to fall, albeit slowly, to reflect the market forces emerging from competition as a result of gradual liberalisation.

Thus, the latest monetary policy may look too cautious from one angle when it comes to rigid policy rates to put a brake on core inflation, but the regulator is adequately accommodating when it comes to money growth and credit expansion. Bangladesh Bank is committed to revising the numbers whenever that is warranted. Good health of the economy is the ultimate target of the central bank, provided the blood pressure remains under control. 

The writer is Chief Economist of Bangladesh Bank.