New monetary policy with higher policy rate comes Thursday

​​ The central bank is going to announce today a new monetary policy for FY23 with an increased policy rate aimed at controlling inflation.

The new monetary policy will also include appropriate steps to keep the foreign exchange rate normal, said sources at the Bangladesh Bank.

Bangladesh Bank Governor Fazle Kabir will announce the monetary policy at 3:30pm at the Jahangir Alam Conference Hall of the central bank, Serajul Islam, executive director and spokesperson of the central bank, told The Business Standard.

The central bank will increase the policy rate to control inflation in the country, which will reduce the liquidity flow and credit flow in the banks. This will also reduce the volatile inflation in the market and might increase the interest rate on bank loans, said central bank sources.

The central bank will increase the policy rate or repo rate – the rate at which the central bank will lend money to commercial banks – to 5.25%. The interest rate for money kept at the central bank by the commercial banks (reverse repo rate) will remain 4%.

Earlier, on 29 May this year, the central bank increased the repo rate from 4.75% to 5 points after almost two years. In July 2020, the central bank reduced the policy rate by 50 basis points from 5.25% to 4.75%.

Bangladesh Bank Executive Director and Spokesperson Serajul Islam told TBS that inflation across the world has been rising due to the disruption in the international supply system and the ongoing Russia-Ukraine war, which has affected Bangladesh as well.

"Therefore, this year's monetary policy will prioritise controlling inflation. However, I would say the monetary policy will not cause an expansion or contraction in the economic indicators. It will be an interim monetary policy," he said.

The central bank's target is to keep inflation at 5.6% in line with the proposed budget, while GDP growth is expected to be 7.5%.

Economists suggest the Bangladesh Bank reduce credit flow and lift the cap on interest rates to effectively curb price hikes.

"Obviously, the Bangladesh Bank should work on stabilising exchange rates and inflation. The monetary policy should be tightened further," Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh told TBS.