With the interest rate on loans soaring, Bangladesh Bank (BB) yesterday reduced the margin that banks use to fix the lending rates in a bid to contain the cost of borrowing and ease pressure confronting businesses.

In a notice, the central bank said banks will be able to charge a maximum margin of 3 percent on the top of the benchmark rate -- the Six Months Moving Average Rate of Treasury Bill (SMART). It was down from 3.5 percent.

Thanks to the cut, the maximum interest rate on loans can be 13.55 percent in April.

The decision comes as the SMART crossed the double-digit mark and stood at 10.55 percent at the end of March, reflecting the tighter liquidity situation in the financial sector of Bangladesh.

A top official of a private bank said had the BB not cut the margin, the interest rate would have crossed 14 percent.

"The central bank has once again slashed the interest margin in its effort to curb the spike in the interest rate."

In July last year, the BB introduced the SMART to allow the interest rate to become more market-based, ending the 9 percent lending rate ceiling, with a view to making funds costlier and rein in the skyrocketing inflation.

Initially, it allowed banks to charge up to 3.75 percent margin. In February, it brought down the margin by 25 basis points to 3.5 percent.

The second cut came as calls to contain the cost of borrowing and the overall cost of business are growing in the business community.

Yesterday, the central bank said it brought down the margin to maintain dynamism in the economy.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the cut would have impact on banks.

"The rising interest of treasury bills and bonds is pushing up the cost of deposit for banks. Now, banks have to offer higher rates to attract depositors. This is putting pressure on us."

In June 2023, the weighted average interest rate of deposits and loans was 4.38 percent and 7.31 percent, respectively. The rates rose to 4.92 percent and 9.75 percent, respectively, in January, BB data showed.