Hiking repo rate not enough to tame inflation

Raising the repo rate is not enough to control inflation. The argument behind the move is that the current inflation is mainly due to supply shock. We are addressing the supply side through import substitution. That is why the central bank has introduced refinance schemes in several sectors including agriculture and SME sectors as import support.

They talked about agricultural productivity. According to them, the production of crops including boro and aman will increase, and thereby the inflation may reduce.

Inflation is now above 8%, which should be brought down to 7.5% by next June. There is a dollar crunch and fuel crunch especially in gas supply. Then there is the power supply uncertainty as diesel, furnace oil and LNG cannot be imported due to dollar crunch.

The question here is– you are giving loans alright, but if factories cannot run for inadequate electricity supply, how will productivity increase. Even if we have money, we are not getting the resources to use it properly. In that case, refinance schemes can be counterproductive. Because, due to various reasons, the supply of goods may not increase after money is injected into the economy.

That is why in my opinion, whether the refinance scheme taken by the central bank to increase the supply will be effective or not, depends on whether the other components of the supply side can be availed. There is no guarantee about that.

Their move on the demand side is that the rate has been slightly increased in consumer loans. Even if the interest rate on consumer loans is increased by keeping a cap on other loans, the demand there will not decrease much. Because a very large portion of total loans are non-consumer loans.

However, monetary policy has lifted the interest rate floor on deposits, which may also boost deposit growth. Because, due to this floor, banks have been losing interest in taking term deposits.

The steps taken in monetary policy to control inflation are insufficient. On top of that, the central bank has monetised it to lend to the government, which increases inflation. There is a question about how much productivity can be increased with only refinancing facilities. Commodity price impacts in global markets are a different matter.

Refinance schemes or monetising are no longer appropriate measures to control inflation. Again, increasing the interest on consumer loans, which is appropriate, is not enough.

The monetary policy talks about bringing the dollar price differential to 2%. But, it laid out no steps to reduce foreign exchange shortage. Some steps taken previously have been mentioned, no new steps have been taken. There was a need to lift the exchange rate cap. There is no separate announcement about that, there is an assurance. As the interest rate of consumer loans has been specifically discussed, no such thing has been said about the exchange rate.

Net foreign assets decreased by 22.67% in the last six months. But according to the target, it is supposed to decrease by 11.5% by next June. Now, to achieve the target, the central bank should not only stop selling dollars from the reserve, but also buy dollars from the market. The monetary policy does not clearly state how this will be possible.

But overall, compared to the monetary policy that was given last June, the revised monetary policy given on Sunday is more realistic. That, however, does not mean all targets can be achieved.

Zahid Hussain is the former lead economist at the World Bank's Dhaka office.