Easy money era not to end for now

It is not the easy money supply but the increased oil price that is blamed for the rising inflation in a study conducted by the Bangladesh Bank.

However, globally, central banks have addressed cheap financing as one of the main reasons for the inflation spike and moved for tightening monetary tools.

In the case of Bangladesh, the central bank is still considering continuing with the easy money era.

The surge in oil price is the underlying factor of inflation in Bangladesh, according to the study.

Even though inflation surged to 6.05% in December, cheap money did not contribute to it, observed central bankers.

A rise of 10% in oil prices will directly increase the national inflation by 0.12 percentage points, said the study.

The government raised the prices of diesel and kerosene by 23% in November last year.

This study attempted to measure the possible impact on inflation due to the recent hike in petroleum prices in Bangladesh.

It found that following the oil price hike, fuel inflation and transport and communication inflation increased significantly, while the overall inflation was not always evidenced to increase so much.

The analysis found that the impact of oil price is temporary as it has an immediate impact on inflation and goes away in a span of three to nine months.

Indirect impact starts to appear immediately and gradually declines over the next nine months before it totally disappears, according to the study report that was presented to the central bank's board meeting held last month.

The high import also added to inflation in the country as commodity prices increased sharply amid global inflation, a senior executive told The Business Standard.

But the Bangladesh Bank is unwilling to tame imports led by the garment sector, which is a good sign for the country, he said.

For instance, an LC (Letter of Credit) opening for capital machinery import increased by 32% in July-December of the current fiscal year, which was in the negative territory in the same period last year.

Textile sector saw the highest 313% growth in LC opening for capital machinery imports during the period when the garment industry was in the second position with 129% growth, according to the Bangladesh Bank data.

The high LC opening of the apparel sector contributed to a rise in the overall import growth to 53% in July-December of the current fiscal year, which was only 7.52% in the entire FY21, according to central bank data.

Although imports are rising, the central bank is rather concerned about food inflation in the upcoming months as the higher diesel price may raise production costs of Boro paddy, which will feed into rice prices, maybe eventually fuelling food inflation, according to the study report.

Ensuring an adequate supply of rice in the market and necessary steps taken by the government can tackle the issue, the study report said.

All kinds of interest rates came down to a historic low in 2020, thanks to relaxed monetary tools during the pandemic.

But the lending rate started to move up at the end of the last year due to rise in credit demand amid the resumption of economic activities.

The private sector credit growth came back to the pre-pandemic level in November registering 10.11% growth, which continued in December.

Though credit growth has been rising, it is still far below the monetary target of 14.8% set for the current fiscal year, prompting the central bank to continue its expansionary monetary stance, said a senior executive of the central bank.

The banking sector is still awash with huge excess liquidity of Tk2.16 lakh crore as of December last year.

How global central banks are acting to tame inflation

The upward inflation trend has driven the Bank of England to raise interest rates from 0.25% to 0.5% recently.

The bank's forecast is that inflation will peak at 7.25% in April once the energy price cap increases by 54%. This will be the highest inflation seen since the early nineties.

Twelve emerging-market rate-setters raised interest rates in 2021.

Yet, all eyes are on the Federal Reserve Bank of America. That is partly because they have a dominant role in the world's financial system, but also because American inflation is high and the Fed is behind the curve. For months it has been stimulating an economy that is already red hot by buying bonds and keeping interest rates at 0-0.25%.

In America, consumer-price inflation has reached 7%, according to the latest report of The Economist titled "How high will central banks go?"

It is predicted that the Federal Reserve Bank will raise rates by 1.75 percentage points in 2022, more than in any year since 2005, according to Economist.