Cenbank won't cut policy rate, weighs re-imposing 4% cap on bank spreads
The central bank is expected to maintain its short-term policy rate, which determines the cost of borrowing for banks, as part of its continued contractionary monetary stance amid prolonged inflationary pressure.
The Bangladesh Bank is set to keep its policy interest rate unchanged for the first half of the fiscal 2026-27 while considering re-imposing a cap on the spread between lending and deposit rates at 4%, according to officials familiar with the discussions.
The central bank is expected to maintain its short-term policy rate, which determines the cost of borrowing for banks, as part of its continued contractionary monetary stance amid prolonged inflationary pressure. Officials said the decision is being shaped by persistently high inflation and macroeconomic uncertainty.
A meeting chaired by Bangladesh Bank Governor Md Mostaqur Rahman yesterday, attended by board members and monetary policy officials, discussed key priorities for the upcoming monetary policy. Officials indicated that maintaining the current policy rate and introducing controls on banking spreads were central topics.
"The Bangladesh Bank is considering setting a defined limit on the gap between lending and deposit rates in an effort to keep borrowing costs within a reasonable range for customers," a senior official, speaking to The Business Standard, said.
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The discussions also covered a Tk60,000-crore financial support package, with board members reportedly stressing proper implementation and safeguards against misuse.
Officials said the upcoming monetary policy would place special emphasis on maintaining exchange rate stability while strengthening foreign exchange reserves.
The policy rate has remained at 10% since October 2024, when it was raised from 9.5%. Although earlier projections suggested possible easing if inflation moderated, the central bank has maintained its tight monetary stance due to continued price pressures.
Industry pushback and policy debate
Business leaders have renewed calls for lower and more stable interest rates. A delegation from the Federation of Bangladesh Chambers of Commerce and Industry previously urged the central bank to reduce lending costs and gradually bring rates into single digits to support investment and industrial competitiveness.
However, bank executives and managing directors have warned that reintroducing a cap on spreads could distort market dynamics. They argue that it could increase borrowing costs for small and medium enterprises while reducing profitability pressures across the banking sector, forcing banks to adjust lending and deposit pricing unevenly.
A private bank managing director said Bangladesh Bank's current approach to measuring gross spreads does not reflect individual bank realities, arguing that pricing should remain market-driven.
Rising spread levels and regulatory changes
Bangladesh Bank data shows that the average spread between lending and deposit rates in the banking sector has widened significantly, reaching 5.72% overall, with some banks recording spreads of 7-9%. Business stakeholders say this has contributed to higher borrowing costs.
The central bank had earlier instructed banks in January to work collectively to bring spreads to a more manageable level. In November 2023, Bangladesh Bank removed the previous 4% cap on spreads, shifting the system towards market-based interest rate determination.
Private credit slowdown and macroeconomic pressures
Private sector credit growth fell to a historic low of 4.72% in March, reflecting weak business confidence and subdued investment activity.
A recently published Bangladesh Bank financial stability report said the economy is facing persistent inflation averaging 10.03% in FY25, alongside slower growth of 3.49%. It also highlighted a shift in bank lending away from private credit towards government securities.
Officials attributed weak credit growth to high interest rates, economic uncertainty, energy price pressures and external shocks, including global supply disruptions.
Policy debate over impact on growth
Economists and bankers remain divided over the proposed spread cap. Some warn that it could further reduce credit growth and disproportionately affect small and medium enterprises, which already face higher borrowing costs compared to large borrowers.
Former Bangladesh Bank governor Ahsan H Mansur said capping spreads could deepen the slowdown in credit growth and make SME lending more difficult. He argued that reducing non-performing loans would be a more effective way to naturally narrow spreads, adding that a rigid cap could push banks towards lower-risk lending behaviour.
