‘Market-based interest rates will be painful for businesses’

"Businesses will find the central bank's move of the market-based interest rates painful as the cost of borrowing will rise. But the policies have been taken in the right direction," Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue (CPD), said today.

He shared the view after the Bangladesh Bank took three major decisions to manage stubbornly high inflation and arrest the depletion of foreign exchange reserves. 

The BB hiked the policy rate at which it lends to commercial banks by 50 basis points to 8.5 percent, discontinued the treasury bill-linked interest rate, and introduced a crawling peg, a more flexible exchange rate system, to allow the taka to find its value against the US dollar within a band.

The measures will stabilise the exchange rate, foreign exchange reserves, and the overall economy, he said.

Overall interest rates will increase for the hikes in the policy rate and discontinuation of SMART, he said.

The relaxation of the exchange rate regime will make imports expensive. 

"Although there is a concern regarding imported inflation for higher exchange rate,  given the current risks and uncertainty, we have to accept this if we want to ensure low inflation and high economic growth," he said. 

But Rahman has some suggestions to make the journey less painful.

It is the efficiency gain. There are various points in the supply chain where efficiency can be improved and cost could be minimised.

"There are areas where efficiency improvement is possible and the costs of businesses could be reduced. If that is done, we can minimize the pain in the short term."