The benchmark interest rate known as Six-Month Moving Average Rate of Treasury Bill (SMART) increased 29 basis points in November, the highest since its introduction, as the banking sector tackles a liquidity squeeze amid the central bank's move to make money costlier and reduce inflation.

Last month, the benchmark interest rate rose to 7.72 percent from 7.43 percent in October, according to data from the Bangladesh Bank, which introduced SMART by removing the interest rate cap on lending in order to gradually allow market forces to determine the rate and bring down demand-induced inflation.

The latest spiral in the SMART means that loans are going to become costlier.

Following the surge, the maximum lending rate of banks will stand at 11.47 percent for December. Banks can now add 3.75 percentage points to the SMART rate as margin for lending.

Industry insiders said the lending rates of banks continued to go up because of rising interest rates of government treasury bills and policy rate hikes by the central bank.

The interest rate for all kinds of treasury bills in Bangladesh crossed a recent high of 10 percent, which pushed the SMART.

On the other hand, during October to November, the central bank hiked the repo rate, also known as the policy rate, by 1.25 percentage points to 7.75 percent.

The latest was the eighth hike in the repo rate in the past 19 months as inflation has kept surging.

The repo rate is the rate at which the Bangladesh Bank lends money to commercial banks and financial institutions.

Bangladesh Bank Chief Economist Md Habibur Rahman recently said that the central bank hiked the rates to bring point-to-point inflation down to 8 percent by December this year and 6 percent within June next year.

However, bankers said the hike in the repo rate would increase the cost of borrowing and drive up deposit rates.

There will be pressure on liquidity in the market, they added.