Originally posted in The Business Standard on 25 August 2024
Bangladesh Bank hikes policy rate to 9% to fight high inflation
The move will result in decreasing consumer spending which is expected to lower the inflation rate
The Bangladesh Bank has increased the policy rate by 50 basis points to 9% in an effort to combat high inflation, marking the third time this year that the key interest rate has been raised.
The decision was made during the monetary policy committee meeting of the central bank on Sunday, with all members, including Bangladesh Bank Governor Ahsan H Mansur, in attendance.
In a circular, the central bank informed the managing directors of banks and non-bank financial institutions that the new rate will take effect tomorrow.
Bankers say as a result of the rate increase, the interest rate for any commercial bank facing a liquidity crisis will rise if they need to borrow from the Bangladesh Bank. Additionally, loan interest rates for customers will also increase. Consequently, higher loan rates are expected to reduce consumer spending, which, in turn, should help to gradually decrease inflation.
A senior central bank official said the Bangladesh Bank is implementing a contractionary policy to control inflation, which has averaged around 10% monthly. The central bank plans to further increase the policy rate, which has already risen seven times since 2023 from 6%.
Governor Mansur recently announced that the policy, or repo rate, would first rise to 9% and then potentially to 10% in phases. He said while businesses emphasise reducing inflation, the central bank’s current monetary policy is effective but will be tightened slightly. Inflation is expected to improve to 5-6% within seven to eight months.
The governor emphasised that interest rates will continue to rise until inflation starts to decrease, and the stable currency exchange rate should also aid in reducing inflation.
General inflation last month, marked by the quota reform movement leading to blockades and curfews, soared to a record high of 11.66%, according to BBS. It was 9.72% in June.
Fahmida Khatun, executive director at the Centre for Policy Dialogue, told TBS that while increasing the policy rate to control inflation is a positive step, fiscal policy must also be addressed. She emphasised that the government should focus on reducing administrative and operational costs to help manage inflation.
“The Bangladesh Bank aims to tighten the cash supply, but in specific cases, such as those affected by floods, government spending should be increased. Additionally, low-interest loans should be provided to farmers impacted by the floods,” she said.
Fahmida said inflation may decrease due to reduced opportunities for anonymous borrowing and lower transaction costs. She explained that as extortion during goods transport decreases, overall transactional costs will drop, leading to lower prices at the consumer level.
Meanwhile, in addition to the policy rate, the central bank has increased the Standing Lending Facility (SLF) rate by 50 basis points to 10.50%, and the Standing Deposit Facility (SDF) rate by 50 basis points to 7.50%.
When a bank borrows from the central bank to meet liquidity needs, the interest rate is determined by the repo rate. The special repo rate has now been renamed SLF. Banks can borrow from the central bank for specific needs through this facility.
Additionally, the surplus funds of banks are deposited in the central bank, or if the central bank wishes to withdraw excess liquidity from the market, this is done through the SDF.