SMART lending rate cap hinders monetary policy transmission to curb inflation: World Bank
The real policy rate and deposit rates remain negative, while the weighted average lending rate is approaching the inflation rate, said the World Bank
The Bangladesh Bank tightened monetary policy further in FY24, but the SMART lending rate cap has dampened transmission, observed the World Bank.
"Monetary policy transmission is hindered by the SMART lending rate cap, which slows pass-through to lending rates due to the use of a moving average. The use of treasury bills for the reference rate, rather than the policy rate, further complicates passthrough," said the latest Bangladesh Development Update report World Bank published today (2 April).
The real policy rate and deposit rates remain negative, while the weighted average lending rate is approaching the inflation rate, reads the report.
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The real interest rate on new lending at or near the SMART rate plus the maximum margin interest (currently 3.5% above SMART) has turned positive.
The new lending rate for April crossed 13.5% when inflation in February was 9.67%, which means the real interest rate for loans is positive 3.88 percentage points.
However, the deposit rate is 9% max, which is below inflation.
The central bank continued to tighten monetary policy in FY24 to slow inflation. It introduced an interest-targeting framework over the past year.
However, monetary policy transmission remains impaired by a variable cap on bank lending rates, said the report.
The Bangladesh Bank recently announced a 10.55% SMART rate for April and the same time, reduced the maximum margin interest rate to 3% from 3.5% to keep lending rate below 14%.
The new lending rate crossed 13.5% in April, even after revising the maximum margin.
If the previous margin had continued, the lending rate would have crossed 14%.
