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Professor Mustafizur Rahman on policy interest rate cuts

Published in The Daily Star on Friday, 15 January 2016

Only rate cuts won’t boost investment

Analysts stress the need for improving business environment, cutting cost of business

Sajjadur Rahman

Only policy interest rate cuts are not enough to boost investment, as there are other factors such as business environment, investment certainty and cost of doing business, which analysts say need to be addressed for a higher growth.

However, they hope that the sluggish investment situation prevailing for the past few years will improve if the cost of bank loan comes down after the key policy rate cut.

Bangladesh Bank yesterday lowered the key policy rate or repo and reverse repo by 0.5 percent to 6.75 percent and 4.75 percent respectively.

Repo rate, at which the BB lends to commercial banks and reverse repo rate at which the BB mops up money from banks, came down for the first time in over three years.

The analysts, however, point out that the central bank could have been a little more ambitious in lowering the inflation target below six percent given the falling commodity prices on the global market.

“This rate cut is just a signal and do not guarantee a reduction in bank interest rates,” said Prof Mustafizur Rahman, executive director of the Centre for Policy Dialogue (CPD).

The benefits of the rate cut will depend on how the transmission mechanism works, he said.

He also said factors like business environment and cost of doing business would be critical to gain from the move.

Ahsan H Mansur, executive director of the Policy Research Institute (PRI), said policy rate cuts would give a stimulus that would let people borrow more at cheaper costs.

But he is not sure whether the move will ensure a lower lending rate.

He said the BB needed to work hard on the spread or the gap between lending and deposit rates.

“If we minus the spread of state banks, the banking industry’s average spread will be six percent plus, which is in no way acceptable,” said Mansur, also a former top official of the International Monetary Fund.

The BB announced its monetary policy stance (MPS) for January-June period yesterday. It has lowered the broad money and private sector credit growth targets to 15 percent and 14.8 percent accordingly. The MPS set a target of private sector credit growth for June at 14.8 percent, which was 15 percent in the previous MPS announced in July last.

The central bank said the target was slightly lower than that in the last, but higher than the actual outcome. In November, the private sector credit growth was 13.72 percent on year-on-year basis.

The MPS has set gross domestic product (GDP) growth target at 6.8 to 6.9 percent. Inflation has been projected at 6.1 percent for June this year, slightly down from 6.2 percent in November.

Dr Mustafa K Mujeri, former director general of Bangladesh Institute of Development Studies (BIDS), termed the new monetary policy as usual and said it would not guarantee an investment boost.

“Policy rate cuts are just an indication and it cannot ensure higher investments as there are other factors, such as investment climate and infrastructure constraints,” said Mujeri, also a former chief economist at the BB.

“We need a quantum jump in investments, but there is no clear message about it in the MPS,” he said.

He also said the BB could have reduced the inflation target below six percent given the global and regional inflation rates.

Zahid Hussain, lead economist at the World Bank’s Dhaka office, said the revised stance on policy rates sent a signal to bankers to expand private credit by reducing lending rates.

To avoid the adverse impact on the profits of the BB, this was an opportune time to reduce the reverse repo rate and correspondingly the repo rate, he noted.

However, though there is not much in this than just the signaling aspect, these reductions signal banks to be more proactive in finding bankable projects and to lend in the private sector.

“Even if banks do not pass on the lower interest rates onto customers, they will be able to borrow more which they can pump into the system,” he said.

Zaid Bakht, an economist and chairman of Agrani Bank, believed the policy rate cuts would have a positive impact on the commercial lending rates as banks’ cost of funds will go down.

“It [rate cut] will be helpful to boost private investments,” he said.

Anis A Khan, managing director of Mutual Trust Bank and chairman of Association of Bankers, Bangladesh (ABB), said that the already declining lending rates would decrease further.

“The rate cuts signal to the market to increase investment activities,” he said.

Khan also hailed the new MPS, saying that it reflected the country’s strong macroeconomic fundamentals.



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