One of the richest philanthropists in the world, Warren Buffet, appeared on a three-generation TV show. It was amazing to see how Buffet along with his son and grandson expressd their goals and priorities. The gap was more evident between Buffet and his grandson in all aspects.  Buffet was happy with his 25-year old flip cell phone; his grandson was using the latest tech iPhone. Buffet was happy with maintaining what he had achieved in life; the grandson appeared to be more of a risk-taker and adventurous about investments and ideas. Bangladesh can be compared to a grandson that is ready for new things. In fact, the policymakers of a 'grandson economy' like Bangladesh should think almost the same way as Howard Buffet, Warren Buffet's 33-year old grandson, who prioritises growth and envisions his planning accordingly, not like his 86-year old grandfather who plans to act conservatively.

After the announcement of the new monetary policy for January-June 2017, the stock market faced a rapid decline, suggesting a negative response of the capital market to the central bank's stance and attitude. Policy rates remained the same, expressing a restrained outlook. A drop in repo (repurchase agreement) and reverse repo even by as low as 25 basis points would have given a different signal to the market. 

A monetary policy's main objective in Bangladesh is to maximise output subject to maintaining moderate inflation. In developed economies, once actual output is above the long-term potential output line, central bankers will tighten monetary policy by raising policy rates so inflation remains within control, say, 2 percent. Thus, making monetary policy in developed countries is structurally different from that in emerging nations. 

The diet for a grandfather is not the same as that for a young boy. Grandpa is a senior citizen who needs to only maintain a healthy life, whereas the teenage grandson needs to grow, and fast. Many developing countries, including Bangladesh, do not have any calculation of the potential output line. These economies rather believe that the line is still above the actual output and hence they devote maximum resources to grow as fast as possible just like the young grandson – as long as inflation does not exceed the tolerable and moderate level of, say, 5 to 6 percent or so.  

The grandpa does not need more weight gain or growth, given his age and health condition. In 2009, economist Martin Feldstein projected average yearly growth of the US to be only 1.9 percent for the whole of the 2010s. The grandpa is happy with that kind of lacklustre growth. However, he needs to check his blood pressure – which we can compare with inflation – almost every day and take medicine if needed, so that he does not die of high blood pressure.  

That is why most developed economies are now targeting inflation as a single goal of their monetary policy. No one criticises central bank governors in developed countries that much if growth becomes even one percent or zero, but they are likely to be fired if inflation exceeds, say, 3 percent. That is how the grandfather has different priorities than the grandson who focuses more on health building. 

India's high growth period following liberalisation was coupled with moderately high inflation. Had the country checked inflation in the same style as other developed countries usually do, India would have ended up having poor growth and even a lower per capita income than ours. They did not pay attention to the IMF's constant advice or the World Bank's perennial suggestions of achieving disinflation by sacrificing growth.

A little heat with inflation provides stimulus to investors and borrowers in developing economies. Many of us forget that a grandpa's medicine is not necessarily appropriate for a teenage grandson like Bangladesh. Over-conservatism takes toll on growth. A grandpa-style diet control will slow down the grandson's health and those conservative prescriptions will further delay our catching up with the developed economies. With a declining trend, inflation reaching as low as 5.5 percent is not news to panick about right now. Such apprehension has been haunting the central bank for years and did not let the regulator reduce policy rates for years.  

The policy rates such as the repo and reverse repo rates (now 6.75 and 4.75 percent) were reduced by only 50 basis points in the last 3 years when inflation dropped by more than 300 basis points. As a result, even the constancy of the repo and reverse repo rates in the last monetary policy was perceived as rather a tightening of monetary policy. If policy rates do not understand the market, the market will make them redundant. That is what has happened to the fate of the policy rates. They became heavily ineffective and their non-market position caused their anticipated but premature death. That has not happened for India because the Reserve Bank of India makes policy rates move up and down pretty frequently keeping a track with the call money rate (interest rate on a type of short-term loan that banks give to brokers)  – which they think is the true reflector of their market liquidity.  

As economist Jayanth Varma asserted in 1997, it would not be wrong to say that the Mumbai call money rate is the true benchmark rate of interest in the Indian economy. Many studies later followed India's call money rate to understand India's monetary policy stance. The correlation between the call money rate and the central bank policy rates is much higher in India than that in our policymaking. The ex-RBI governor Raghuram Rajan believed in policy activism and changed policy rates swiftly whenever needed to earn optimal results for investment and output. 

Dhaka's call money rate is around 3.5 percent whereas the repo rate is still as high as 6.75 percent. Thus, the recent monetary policy does not reflect policy activism in response to the continued fall in inflation for the last four years and the prevailing liquidity condition in the market. Private credit growth is falling since last June. We should not stop helping private credit only out of fear from the ghost of the 2010 stock market crash. Let the stock market regulator be vigilant about the stock market and the central bank should be more supportive to investment and growth in this 'grandson economy'.

The writer is adjunct faculty of the Institute of Business Administration at the University of Dhaka.