Expectations from new monetary policy

The monetary policy for the fiscal year 2016 is coming soon. Its arrival in the wake of the recently announced budget will build the bridge between the Ministry of Finance and Bangladesh Bank, heralding coordination between fiscal and monetary policies. So will the central bank be able to meet all expectations while formulating its new monetary policy?

Although the interest rate is not the single panacea for stimulating investment particularly in Bangladesh where other institutional impediments prevail, the investors will still expect a reduction in lending rates. On the other hand, the savers will ask for higher deposit rates. This situation will eventually prevent lending rates from falling. Both groups are essential to the banking system, but both sides cannot be satisfied at the same time. Whether an economy demands more savings or more investments at a particular point in time eventually shapes the mind of policymakers. Bangladesh Bank will not be an exception.

The classical saving investment equality collapsed during the Great Depression when Keynes came with the idea of the saving-investment gap. A relatively open economy can invest more than its amount of saving by borrowing from outside at a lower interest rate from abroad than that at home. That has been the case for Bangladeshi investors and the central bank has encouraged this stance in the past.

Traders of the stock market are eager to see how the new monetary policy begins to unfold. Because of the inverse relationship between the interest rate and the stock index, the share buyers and sellers always expect an expansionary monetary policy and a low interest regime. The Dow Jones index in the New York Stock Exchange made a fortune from 8,000 to 18,000 between 2008 and 2015 mainly because the Fed funds rate was suppressed to near zero over the entire period. But the central bank will always be watchful not to create any bubble in the stock market by suppressing the interest rate beyond necessity. High inflation and other institutional rigidities prevent interest rates from falling too low in developing economies - a situation that warrants high rates of return to survive or thrive in the share market.

The government expects that the monetary authority will be more accommodative in money supply so achieving the targets of 7 percent growth and 6.2 percent inflation becomes convenient. If money growth is far above the accommodative level, say approximately 7 percent plus 6.2 percent assuming constant money velocity, this easing will brand monetary policy as expansionary. In contrast, if money growth falls below say 13 percent, that tightening will label monetary policy as contractionary or restrictive. It will soon be time to see whether Bangladesh Bank chooses either of the extremes or remains simply accommodative.

Time has come to review the right hand side of the output equation that comprises consumption, investment, government spending and net exports. Consumption represents 70 percent to 80 percent of the GDP, but consumers often remain neglected by both fiscal and monetary policies because they are not as organised as businessmen, especially in developing economies. No one checks whether the expectations are materialised. Consumers always expect prices to go down, but businessmen and particularly sellers and investors expect the opposite. 

Since Bangladesh Bank has already made some footprints in its developmental role for the society, the beneficiaries will again look forward to receiving similar packages of empowerment for the future. Women entrepreneurs will expect further facilitation roles of the central bank for them, so will SME owners. Environmentally responsible productive ideas will expect the arrangement of funds from the biggest capital regulator of the country - the central bank. 

Unlike monetary policy of advanced economies, monetary policy of Bangladesh Bank has recently pursued the theme of macro-developmental central banking that aims at building the supply side capacity as well as the demand side factors of the economy.  For example, the central bank's loan for a solar plant builds the supply side capacity and thus long-term productivity in an environmentally responsible way. Once the supply side is adequately addressed, an economy's growth potential goes up. Then delivering demand side incentives such as consumer credit to buy television sets or cell phones becomes highly effective to raise income. The empowerment of rural people in this style has already proved productive and beneficial to the economy. 

To satisfy all the expectations together in a single monetary policy is humanly impossible. The central bank will prioritise the expectations based on its ultimate objective and accountability to the economy. We need to wait and see how many of them the central bank can accommodate in devising its new monetary policy due in a couple of days.

The writer is chief economist of Bangladesh Bank.