9% deposit rate, 12% lending rate would be ideal

The central bank has lifted the cap on bank deposits. It is good on one hand, but the central bank should have lifted the lending rate cap to control inflation, otherwise it would have been better if the deposit and loan rates of the banks were 9% and 12% respectively.

Some banks can take additional benefits due to no deposit rate floor. Consumer loan rates have gone up to 12% but interest rates on industrial loans or other loans remain the same. Those with higher industrial loans can lower the deposit rate below 6%. But banks with high consumer loans can offer deposit rate above 6%. In my view, the latest monetary policy is good and the central bank should review it from time to time.

The central bank has increased the policy rate but the liquidity management with the policy rate will not impact the credit growth. For credit growth, the lending rate should be increased and that can work to reduce inflation.

Raising the repo rate in the current liquidity crunch may be more counter-productive. Keeping the repo rate at the previous rate or reducing it a bit seems to be more reasonable amid the existing liquidity crisis in the market.

Confidence of depositors has decreased due to some loan irregularities of some banks coming to light. So it was natural to increase the liquidity supply and credit growth at this time. The target of Bangladesh Bank is right, they have increased the credit growth slightly, but increasing the repo rate at the same time is somewhat contradictory.

Adapting contractionary policy to control inflation will not be very effective in the case of Bangladesh. The lending rate is not changing. Liquidity crisis may worsen with increased repo rate. Through this, the message is – the monetary policy is made a bit more contractionary. The repo rate increase, which is not that much, may have been done due to pressure from the IMF.

Dr Monzur Hossain is Research Director at BIDS