Cenbank weighs interest rate cut as officials remain divided
The debate comes as lending rates remain elevated following recent policy rate hikes. Businesses have repeatedly urged the central bank to reduce rates, but no action has been taken so far.
The Bangladesh Bank is weighing whether to adjust policy rates in its upcoming monetary policy as internal discussions show sharp differences over the impact of interest rates on investment, inflation, and growth.
The issue was discussed at a meeting today (20 May), chaired by the governor, attended by all deputy governors, executive directors, and directors. The meeting was part of a series of consultations ahead of the next monetary policy statement.
The debate comes as lending rates remain elevated following recent policy rate hikes. Businesses have repeatedly urged the central bank to reduce rates, but no action has been taken so far.
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Officials at the meeting expressed divergent views. One group argued that lower interest rates are necessary to boost investment and employment, warning that high borrowing costs risk undermining Bangladesh's competitiveness compared to neighbouring economies. They said rate cuts are essential for stimulating private sector credit growth and job creation.
Another group opposed immediate cuts, citing the "9-6 interest rate regime" between 2021 and 2024, when artificially capped lending rates failed to deliver expected investment growth. They argued that this period shows that reducing interest rates alone is insufficient to drive economic expansion.
A central bank official told TBS that Deputy Governor Zakir Hossain Chowdhury said Bangladesh is not heavily credit-dependent and that people do not typically borrow in response to price increases.
He reportedly noted that the link between interest rates, inflation, and investment is not strongly direct in the local context, adding that price increases often stem from weak market management, while strong agricultural output helps reduce inflation.
Deputy Governor Md Kabir Ahmad also said conventional economic models do not always reflect current realities and stressed that policy decisions must be taken cautiously and based on context.
The meeting further discussed profitability trends in stronger banks. Officials said deposit migration from weaker to stronger banks allows some institutions to raise deposits at lower costs while still charging higher lending rates, significantly widening interest spreads.
No decision was taken on whether rates will be increased or reduced.
Under the current monetary policy, private sector credit growth is targeted at 8.50%, but only 4.27% was achieved in March – one of the lowest levels on record. Inflation is targeted at 7%, while GDP growth is projected at 5%.
