Inflation: Is BB doing enough?

Keeping inflation in check is among the key functions of a central bank. This is why spiralling prices have taken away sleep from central bankers in major economies.

As inflation raged well beyond targets, pressing consumers hard and raising fears of slow growth, central banks in countries like the USA, the UK and India are taking drastic steps to steer their economies through an inflation surge aggravated by the Russia-Ukraine war.

They raised key policy rates during the past couple of weeks to control loans and spending.

Inflation in Bangladesh also modestly exceeded the central bank's target.

Though the central bank significantly raised LC margins to check luxury imports, harsh monetary steps like raising bank rate or repo rate are not in Bangladesh Bank's thinking as yet.

Independent economists believe that the official inflation figures do not reflect the real market prices. They said the central bank's steps are not enough to keep inflation from further spiralling.

Although the government set a target to keep the rate of inflation below 5.5% in the current fiscal year, the economy faced 6.22% point to point inflation in March. The moving average inflation of the last twelve months released by the Bangladesh Bureau of Statistics (BBS) is also far above the budgetary target.

However, economists and experts anticipate that the market price has been increasing faster recently than the data compiled by the BBS shows. The daily commodity price bulletin of the Trading Corporation of Bangladesh (TCB) also showed higher trends.

According to TCB data released yesterday, the price of crude oil that was earlier sold at Tk118 per litre has risen to Tk192. Edible oil prices have risen by 48% to 66% depending on the type while atta prices have risen by 40% and flour by 60%. At the same time, prices of all kinds of spices including onion, garlic, ginger, and chilli have gone up at an unusual rate.

Economists say in addition to the reluctance to disclose the true nature of inflation, there is also a lack of initiative on the part of government agencies to control inflation.

They say inflation in the domestic market has been rising over the past few months due to rising prices in the international market.

The recent rise in trade deficit has led to a decline in foreign exchange reserves and an increase in exchange rate pressures.

How global central banks are responding

As prices reached their historic highs, authorities even in rich economies are concerned about the sufferings of low-income people and taking harsh steps like making loans expensive despite recession fears.

As runaway prices are becoming baked into everyday life, inflation now dominates public conversation and newspaper reports there, prompting people in authorities to speak out and act upon.

To Americans, inflation is a bigger problem than Russia's invasion of Ukraine. Moaning about higher prices has become a conversation starter in America where newspapers are publishing four times as many stories, mentioning inflation, as they did a year ago, writes The Economist.

Skyrocketing prices dominate the popular psyche in Bangladesh too, with ordinary people at wayside tea stalls or experts at television talk shows trying to link between surging cost of living and official data of per capita income jumping by $233 to $2824 in the next three months.

The remark of the American central bank chief, while announcing benchmark rate hike last Wednesday, showed how the authority is concerned about the people's suffering in the world's No 1 economy.

"Inflation is much too high and we understand the hardship it is causing. We're moving expeditiously to bring it back down," US Fed Chairman Jerome Powell said during a news conference last week.

Noting the burden of inflation on lower-income people, he stated the central bank's strong commitment to restoring price stability.

UK inflation reached its highest level since 1982, raising recession worries in the world's fifth largest economy. Even this looming risk did not hold back the Bank of England from raising interest rates to their highest level in 13 years to help millions of households grappling with skyrocketing living costs.

BoE Governor Andrew Bailey said they are "walking a narrow path" and that the bank rate was hiked not only to address the current inflation but future inflation expectations.

India's central bank, the Reserve Bank of India, acted through increasing the repo rate to check prices from going completely out of hand.

Economists find BB steps not enough

Though its own forecast of inflation going out of target, Bangladesh's central bank has not weighed any such options yet. No formal statement regarding inflation has been made so far, and relevant officials of the central bank could not be reached for comment on their latest stand in this regard.

In its monetary policy review 2021, released just a week after the Russia-Ukraine war broke out, the Bangladesh Bank had warned that global commodity price hikes, further aided by unfolding geopolitical conflicts, might create price pressure for the country, causing the government to miss its inflation target.

Though it referred to the global central banks' plans to squeeze money supply to curb inflation, it itself opted for continuing with the current expansionary and accommodative monetary stance.

Bangladesh Bank Governor Fazle Kabir told a key policy meeting last month that inflation might spiral out of the central bank's target and requested a higher inflation projection for the next fiscal year.

At the same meeting, Finance Secretary Abdur Rouf Talukder warned that inflation might even reach 9% if subsidies were cut and fuel and fertiliser prices are adjusted to the market.

As instructed by the prime minister, subsidies have not been cut and prices of fuels and fertilisers have not been raised.

Even then inflation crept to 6.22% in March from 6.17% in February. Monthly average inflation was 5.75% in March, above the central bank's target.

Professor Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue (CPD), said in addition to the national budget, the central bank's monetary policy has set a target of 5.5% inflation for the current fiscal year, but according to the BBS, the consumer price index has risen by 6.22% year-on-year. The 12-month average inflation till March is also well above the target. However, the prices of daily commodities in the market are much higher than the data provided by the BBS.

"Prices of food and fuel, including gas and oil, were rising due to rising demand as the global economy began to recover from the coronavirus pandemic. In the wake of the Ukraine-Russia war, prices of almost all kinds of goods escalated further. The prices of daily necessities have gone up in such a way that even if inflation does not rise any more, the ongoing high prices will make life difficult for many," he said.

The main reason for our current inflation is excessive import dependence. Oil, fertiliser, fuel, food and other products are being imported. The increase in exports at this time is also due to the huge cost of importing raw materials, he said.

In this situation, the central bank has taken some initiatives to curb the rush of import expenditure, but those are less than required.

"LC margins have been increased to discourage imports of various luxury goods including cars. This will temporarily reduce the pressure on foreign exchange," Mustafizur Rahman tells The Business Standard.

Dr Selim Raihan, executive director of the South Asian Network on Economic Modeling (Sanem), said looking at the global forecast it seems that the issue of rising product prices is no longer temporary. Analysing the effects of the war, the price of materials, production trends in different countries, it seems that the prices of goods will be higher throughout the current year. In this situation, temporary measures to control inflation will not be of much use.

"When it comes to talking about inflation in Bangladesh, two things come to the fore. First of all, is the BBS' inflation calculation realistic? The question of whether this official data represents the real situation of the market has also been raised by Sanem," Dr Selim Raihan says.

The professor of economics thinks the government's inflation data contains a lot of underestimates. In reality, the real inflation may be even higher in the market.

"The second question is: Is the initiative taken by the government to control this inflation enough?" he asks.

Under the current circumstances, there is no alternative to discouraging imports of non-essential goods and consumer goods, he feels. "LC margins have been increased to discourage imports of luxury goods. However, if the NBR wants to give more importance to this issue, it can increase the tax rate on luxury products," he adds.