Bangladesh Bank (BB) should remove the interest cap on lending in its upcoming monetary policy to control the persisting high inflation, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

The central bank is scheduled to announce its monetary policy for the January-June period of the fiscal year 2022-23 this afternoon.

"Inflation is still higher, and there is a probability to stoke it further…," he said.

If the central bank wants to control inflation, it will have to withdraw the 9 per cent cap on interest for lending, he said.

The banking sector has been following the cap since April 2020 as per the instruction of the Bangladesh Bank.

Mansur said although the central bank frequently claimed that it had imposed the cap to ensure a smooth supply of credit to entrepreneurs, such a cap hardly plays any positive role in gearing up economic activities.

Macroeconomic stability is much more important than following a fixed interest rate cap, he said.

He said business associations, including the Federation of Bangladesh Chambers of Commerce and Industry, have compelled the central bank not to withdraw the interest rate cap.

If the commoners, including businesses, do not get a good return from banks, they will not bring their money to the country, said Mansur, also a former high official of the International Monetary Fund.

This ultimately creates pressure on the foreign exchange regime, which has been facing volatility since the second half of last fiscal year.

Remitters will feel encouraged to send more money to the country if they enjoy a better return from banks, he said.

"This is also applicable to the exporters. Some exporters may not repatriate their earnings to the country due to the lower interest rates offered by banks," he said.

In addition, many individuals and businesses now invest their funds in unproductive sectors, such as land and gold, as they are not getting their desired returns on keeping money in banks, Mansur said.