Bangladesh's inflation puzzle: A crisis deeper than monetary policy

Bangladesh's inflation is increasingly turning into a difficult policy puzzle. Several neighbouring South Asian countries, including some that recently faced severe macroeconomic pressures, have been able to bring inflation down relatively quickly. Why, then, does Bangladesh appear likely to continue experiencing inflation at one of the highest levels in the region?

According to the Asian Development Bank's September 2026 forecast, Bangladesh's annual average inflation could reach 8.7% in the 2025–26 fiscal year and 9.0% in 2026–27.

BB keeps policy rate unchanged, will monitor energy price hike impact

One thing is clear from these projections: Bangladesh's inflation can no longer be explained simply by volatility in global markets, import costs or temporary supply shortages. These factors are certainly important. But inflation has also become deeply connected to weaknesses in Bangladesh's economic structure and policymaking.

Food prices, exchange-rate depreciation and the cost of imported fuel are important drivers. Yet persistent inflation also reflects weak competition, supply-chain bottlenecks, inadequate transport and storage systems, excessive market concentration and delayed macroeconomic adjustments.

There is a persistent asymmetry in the market. When costs rise, prices increase quickly. But when cost pressures ease, prices do not fall at the same pace. Weak market monitoring and ineffective competition policy allow this asymmetry to persist.

This is why tighter monetary policy is necessary, but raising interest rates alone cannot fix failures in product markets and supply systems.

Another risk is emerging from fiscal policy. The government's spending commitments on social protection, public-sector salaries and other areas are increasing, while revenue mobilisation remains structurally weak. The budget for 2026–27 projects a deficit of Tk2.26 lakh crore, including plans to finance Tk1.25 lakh crore from domestic sources.

If expenditure continues to grow faster than sustainable revenue, the government's dependence on borrowing will increase further. Higher government borrowing can put pressure on domestic liquidity and raise the cost of financing. If deficit financing becomes excessively accommodative, it can also intensify inflationary pressures.

The fundamental gap here is the absence of a credible medium-term plan that links new spending commitments with sustainable sources of revenue.

The recent increase in fuel prices has created another immediate inflationary pressure. The prices of diesel, petrol, octane and kerosene have each increased by Tk20 per litre.

Diesel use is directly linked to goods transportation, irrigation, public transport, generators and industrial production. As a result, an increase in fuel prices spreads quickly across the economy, raising the costs of transporting and producing food as well as other goods.

But the issue is not limited to higher international oil prices. There also needs to be serious discussion about inefficiencies in the energy sector, the mechanism for setting prices, the tax burden on petroleum products and the financial weaknesses of the institutions involved.

If these structural problems remain unresolved and additional costs are simply passed on to consumers, necessary price adjustments in the energy sector could repeatedly become new sources of inflation.

A third concern is the stagnation of investment. Private investment remains weak, with businesses citing policy uncertainty, regulatory complications, energy shortages and institutional weaknesses.

Political uncertainty, concerns over law and order, bureaucratic barriers and doubts about policy continuity can further delay investment decisions.

The connection between weak investment and inflation is direct. When investment remains subdued, future production capacity becomes constrained. If supply capacity grows slowly while nominal demand continues to rise, controlling inflation becomes increasingly difficult.

Low investment also weakens productivity, employment and income growth, making it harder for households to cope with the pressure of high inflation.

Bangladesh therefore faces an uncomfortable combination of persistent inflation, growing fiscal pressure, a fresh shock from higher energy costs and weak investment.

Viewing inflation primarily as a monetary policy problem risks missing the bigger picture. What is needed is a combination of monetary discipline, fiscal credibility, stronger competition policy, energy-sector reform, better supply systems and a predictable investment environment.

Without such an approach, there is a risk that high inflation will cease to be a temporary exception and become a normal feature of the economy.

The people who will suffer most are those whose incomes are fixed or adjust only slowly. The question of restoring price stability, therefore, is ultimately not just a question of interest rates. It is a question of the capacity of the institutions that shape the relationship between costs, credit, supply and inflation expectations.

Dr Selim Raihan is a professor of Economics at Dhaka University and executive director of the South Asian Network on Economic Modelling (Sanem).