Cenbank’s three steps were all necessary
Inflation persists due to policy weaknesses. The steps the central bank is taking now should have been implemented much earlier.
We have been advocating to free the lending rate for quite some time. The central bank has finally taken this step, which I believe is positive. However, I sincerely hope that this lending rate will genuinely reflect market conditions.
The three measures taken by the Bangladesh Bank today were all necessary and coordinated to support each other.
The lending rate cap has been in effect for almost four years since April 2020. The inflation could not be controlled due to this.
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The foreign currency exchange rate has been taken close to the actual market rate. Currently, the curb market rate is Tk118-Tk119 per dollar. The Central Bank's crawling peg mid rate (CPMR) has been set at Tk117, which is good.
The central bank increased the policy rate by 50 basis points to 8.50%.
The policy rate needs to be increased by two or three steps. I expect it to be raised to 10%. If the loan interest rate increases further while the policy rate remains unchanged, banks may increase borrowing from the central bank.
Inflation persists due to policy weaknesses. The steps the central bank is taking now should have been implemented much earlier. I believe that if the exchange rate remains stable, inflation will decrease to a manageable level in the future.
According to the crawling peg method, the price of the dollar has increased by Tk7, which reflects the actual market rate. Even if the dollar rate rises, I don't believe it will affect inflation.
The crawling peg may endure longer if the IMF's suggestions are followed; however, adjustments need to be made periodically.
However, it will have an impact on the government's budget. The government will now have to adhere to the new rates to purchase oil and gas, potentially leading to an increase in the government's budget deficit.
On the other hand, it has been beneficial for exporters, as they will receive eight taka more for their exports. This may incentivise them to ramp up exports once again. Overall, I believe it is a positive development, but effective implementation is crucial.
Ahsan H Mansur is the executive director, Policy Research Institute (PRI)
