BB set to slash credit target, keep policy rate unchanged in new monetary policy

Highlights:

• Private sector credit growth target cut to 7.2%
• Policy rate remains unchanged at 10% to curb inflation
• Inflation dropped to 8.48% but exceeds 7% threshold
• Central bank urges rice imports to control food inflation
• Repo, SLF rates unchanged; SDF rate reduced to 8%
• Experts divided on achievability of new credit growth target

The Bangladesh Bank is set to unveil its Monetary Policy Statement (MPS) today for the first half of the fiscal 2025-26, significantly lowering the private sector credit growth target to 7.2% from 9.8% in the preceding half.

Concurrently, the central bank has decided to keep its key policy rate unchanged at 10%, aiming to further bring down the inflation rate.

The revised target received approval during a central bank board meeting held on Wednesday, a board member told TBS yesterday. 

This adjusted projection comes as private sector credit growth recorded a mere 6.40% in June this year, a level not observed in recent times, having consistently hovered below 7% for several months. The central bank anticipates that overall private sector credit growth will reach 8% by the end of the full FY26, he said.

Bangladesh Bank Governor Ahsan H Mansur is scheduled to unveil the new Monetary Policy Statement for the July-December 2025 at 3pm today.

Policy rate and inflation outlook

A senior central bank official confirmed that the decision to maintain the policy rate aligns with Governor Mansur's earlier declaration: no rate cuts until the inflation rate falls below 7%.

While inflation, which peaked at 11.66% in July 2024, dropped to 8.48% in June of the current year – its lowest in 35 months – it still remains above the central bank's threshold for a rate reduction.

This decline, however, suggests the effectiveness of the central bank's monetary policy, among other contributing factors. The government's budget for the current fiscal year targets an average inflation rate of 6.50% and a growth rate of 5.50% by June 2026.

Another board member said that the meeting acknowledged the central bank's inability to curb inflation solely through monetary policy. A significant portion of food inflation, particularly driven by rising rice prices, necessitates external intervention. Consequently, the central bank will advise the government to import rice as needed to maintain adequate reserves.

Current policy rates

The Bangladesh Bank last adjusted its policy rate, the repo rate, on 22 October last year, increasing it by 50 basis points to 10%. This rate applies to short-term loans banks take from the central bank against government securities. 

In the new monetary policy, the Standing Lending Facility (SLF) rate, which governs interest on emergency loans, will remain unchanged at 11.50%. However, to stimulate the interbank call money market, the central bank reduced the Standing Deposit Facility (SDF) rate by 50 basis points to 8% on 15 July. This rate applies when banks deposit funds with the central bank.

 Achievability of credit growth target

Mustafa K Mujeri, former director general of the Bangladesh Institute of Development Studies and former chief economist at Bangladesh Bank, expressed scepticism. He cited a challenging business environment, inconsistent fuel supply, an abnormal law and order situation, and a generally depressed economy with stagnant production and investment. 

"Private sector credit only increases when investment or production in the country rises," he said. "The current business environment is not very good, and I don't see a significant improvement in the next six months, making it very difficult for the central bank's projection to materialise."

Tanjil Chowdhury, managing director of East Coast Group and Chairman of Prime Bank, however, considers the central bank's target realistic. 

Firstly, he believes that government and business initiatives will yield positive outcomes regarding potential US tariff impacts, thereby improving the investment climate. 

Secondly, Tanjil views the current degrowth in import Letters of Credit (LCs) as a temporary situation, anticipating an increase in imports and, consequently, private sector credit growth. He also noted the strengthening Taka, which he believes will bolster the economy. 

Thirdly, he highlighted that export orders are not decreasing, presenting a strong opportunity. "By focusing on this export sector, I believe we can achieve the private sector credit growth target."