Central bank to maintain excess liquidity in money market
There would be no change in the policy until the private sector’s credit growth reaches 10%
The Bangladesh Bank wants to continue the policy of maintaining excess liquidity in the money market so that there is no shortage of cash to recover the economy from the impacts of Covid- 19.
That is why no reverse repo auction was held in the two quarters (July-September and October-December) of last year.
The central bank revealed this information in the quarterly report on currency and currency exchange on Tuesday.
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The reverse repo is the withdrawal of surplus money from commercial banks through treasury bills and bonds to control the money supply.
On the other hand, when a bank suffering financial crisis takes loan from the central bank by depositing treasury bills and bonds is called repo.
Asked about the maintaining the liquidity in the currency market, Habibur Rahman, executive director of the Bangladesh Bank, told The Business Standard that the central bank has been pursuing a policy of maintaining liquidity since July last year to deal with pandemic's shock.
Although banks have excess liquidity, that policy has been continued in the first quarter of this year (January-March). He said there would be no change in the policy until the private sector's credit growth reaches 10%.
The credit growth in the private sector has been steadily declining since September last year. It fell to 8.32% in January this year, but the target for the second half of the current financial year is 11.5%.
Moreover, the government is taking fewer loans than usual as it has to spend less. This too is contributing to the excess liquidity in the banking system.
Besides, the central bank is implementing an incentive package to tackle Covid-19 as well as keeping the exchange rate stable by buying dollars from the market.
All in all, there is a huge amount of excess liquidity in the banking system, which exceeded Tk2 lakh crore at the end of December last year.
However, Habibur Rahman thinks that excess liquidity will not provoke inflation.
He said, "Considering the international context, inflation would not come suddenly unless there was some kind of natural calamity in the country."
Meanwhile, banks do not have to borrow money from other banks for a short period of time due to excess liquidity. As a result, call money (interbank loan) interest rates fell to 1.69% at the end of December.
