Policy tools alone cannot control inflation

The recently announced half-yearly Monetary Policy Statement (MPS) of Bangladesh Bank (BB) sets the monetary policy direction for the second half of FY25. Its primary objectives include reducing inflation, stabilising the foreign exchange market, rebuilding BB's foreign exchange reserves, and addressing the rise in non-performing loans (NPLs) in financial institutions. 

While these measures focus on stabilising the money market—a positive step—expectations were higher for key policy tools to curb inflation, attract investment, and generate employment.

To control inflation, BB has opted to maintain the policy rate at 10%, with corresponding adjustments to the Standing Lending Facility (SLF) at 11.5% and the Standing Deposit Facility (SDF) at 8.5%, establishing a policy rate corridor of ±150 basis points. 

The spread rate set by BB has translated into a higher spread for commercial banks and other financial institutions, currently around 6%. Compared to other developing countries, this spread can be reduced gradually. With the policy rate (repo rate) at 10%, market-based interest rates cannot realistically fall below 16–18%. 

A recalibration of the SDF and repo rate is necessary to bring down the spread rate over time—from the current 5.93% to around 2%, aligning with countries such as Sri Lanka (below 2%), the US (2.5%), and India (2.96% in 2024).

Despite stringent fiscal and monetary measures, inflation remains above 10%, though it showed signs of easing in December 2024 and January 2025, primarily due to a decline in food inflation. BB is targeting an inflation range of 7–8% in the near term. 

However, a study by BUILD indicates that supply-side inefficiencies persist, with extortion dominating field-level operations. The supply chain remains concentrated, with only 8–9 entities controlling the import of consumption goods, creating an oligopolistic market structure. 

Additionally, with 42% of the economy operating informally (Economic Survey 2024) and recent amendments to VAT and SD policies, inflationary pressures continue to mount. Strengthening coordination between the NBR and BB is crucial, as is reinforcing law enforcement agencies.

The Competition Commission, tasked with addressing market anomalies, remains largely ineffective. Composed of retired government officials and operating under the Ministry of Commerce, it lacks the authority to take decisive action against wrongdoers. As a result, market distortions persist, disproportionately affecting marginalised populations and farmers, who have been struggling for prolonged periods.

According to the MPS, Bangladesh Bank (BB) has rolled out an extensive strategy to tackle economic and financial challenges. Key reforms include the formation of three task forces to conduct an asset quality review of banks, enhance BB's regulatory oversight, and recover stolen assets. 

While these initiatives aim to stabilise the economy and reform the banking sector, a clearly defined timeline would instill confidence in the process. Implementing these reforms will also require expert support and access to reliable, authentic information—an ongoing challenge in the country.

The global economy is projected to grow by 3.2% in 2024 and 2025, which could support Bangladesh's exports and remittances, as noted in the recently announced MPS. However, the statement does not outline any clear policy measures to capitalise on these opportunities. A key question remains— can Bangladesh effectively leverage ongoing geopolitical shifts to its advantage?

BB is managing the foreign exchange market through a crawling peg exchange rate mechanism. It has ceased interventions in the interbank market to stabilise the exchange rate, leading to a boost in remittance inflows and exports. 

However, trading in the spot market under the crawling peg system remains impractical for banks, as the fixed rate is lower than other rates used in cross-country currency transactions. Currently, Bangladesh uses six different currencies for bilateral trade and foreign currency transactions. 

A currency-specific trade volume strategy could help BB better understand demand and supply dynamics, allowing for more effective exchange rate management.

The negative growth of Bangladesh Bank's Net Foreign Assets (NFA), which has declined by 15.7%, is primarily due to debt service payments. Borrowing may reach Tk1.5 trillion, significantly higher than the revised Tk990 billion, due to a revenue shortfall of Tk580 billion in H1FY25, according to NBR data. 

Local deficit financing will be critical, as banking sector deposits are showing concerning trends. The MPS, however, does not provide any guidance on this issue. Reports suggest Bangladesh will face financial strain until 2029 due to mounting project repayments. In response, BB could introduce a special deposit scheme with attractive incentives for a limited period, which could not only help mobilise idle funds but also aid in inflation control.

Private sector credit growth stands at 7.3%, falling short of the projected 9.8%, contributing to lower productivity rates, as reported by BBS. Industrial growth, which was 8.22% in Q1 of FY24, has dropped sharply to 2.13% in Q1 of FY25 (July–October). 

The import of capital machinery has also declined by 25.1%, amounting to $1.03 billion by November 2024, compared to the previous fiscal year. This signals a weak investment climate at a time when attracting FDI and retaining existing investors should be a top priority for the government.

The employment situation remains critical, with layoffs in multiple industries and job cuts deepening the crisis. While several task forces have submitted extensive recommendations, the key question remains— who will implement them, and how? Without a clear roadmap, policy recommendations risk remaining on paper rather than translating into tangible outcomes.

Businesses had hoped for a lower interest rate with simpler loan conditions to facilitate both existing and new investments. However, no significant progress has been made in this regard, leaving the private sector frustrated amid continued uncertainty. Keeping the policy rate at 10% will further raise production costs, inflate the cost of raw materials, increase wages, and drive up machinery expenses—ultimately inducing policy-driven inflation. This contradicts the broader objective of reducing inflation.

A high policy rate alone cannot control inflation. Addressing supply-side constraints, restoring depositor confidence, ensuring strong law enforcement, maintaining a transparent database of stock levels, and penalising market manipulators are equally crucial. In several countries, a well-functioning Competition Commission plays a vital role in regulating market distortions. BB should consider strengthening such institutions, as merely monitoring essential commodity prices in select markets fails to reflect the broader economic reality.

Inflation is calculated based on the average price increase of a selected basket of goods and services over a specific period. The Consumer Price Index (CPI) basket currently includes 383 products, with each item assigned a weight reflecting its relative importance in total estimated expenditure. These weights determine the impact of individual price changes on the overall index.

However, several items in the CPI basket may not be essential for marginal populations. A separate CPI basket, tailored to different levels of consumerism, could provide policymakers with a clearer picture of essential goods and services that require price controls. 

Additionally, segregating industrial products, imported goods, agricultural products, and services would enhance accuracy, as their pricing dynamics differ based on sourcing and market conditions. While price fluctuations are inevitable, ensuring affordability for basic necessities should remain the priority.

Sketch: TBS

Ferdaus Ara Begum is the CEO of BUILD, a public-private dialogue platform that works for private sector development.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.