BB keeps policy rate at 10% due to unmet inflation target, excessive govt borrowing
The Bangladesh Bank has continued a tight monetary stance as it sees several near-term inflation risks including upcoming national elections, Ramadan and implementation of a new national pay scale for government employees.
Moreover, excessive government borrowing put the money market under pressure keeping money rates upward, Bangladesh Bank Governor Ahsan H Mansur said.
Considering those inflationary risks, Bangladesh Bank has unveiled its new monetary policy for the second half of the current fiscal year keeping policy rate unchanged at 10%.
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Although inflationary pressures are subsiding, cutting policy rate will be premature as the price level did not come to the expected level, said Governor Mansur when announcing the monetary policy at a press conference held at its headquarters.
Bangladesh Bank announced the latest monetary policy at the time when inflation hit eight-months high to 8.58% in January.
"Our previous target was to bring down inflation to below 7% level but it is still above 8%" said the governor.
He said government borrowing put the money market in pressure causing crowding out of the private sector.
The demand-side pressure will continue after the election which will keep money rates upward.
"So, we will not reduce policy rate right now but will keep close monitoring," he said.
"Commercial banks are investing in government treasury bills and bonds instead of private sector lending amid high borrowing demand of the government causing historic low growth of private sector credit," said the governor.
Government borrowing stood at nearly 29% at the end of December against a target of 18.1% when private sector credit grew by 6.1% against a target of 8%, Ahsan H Mansur added.
In this situation, the Standing Deposit Facility (SDF) was reduced to 7.5% from 8% to encourage banks to invest money in the money market and private sector instead of parking money with Bangladesh Bank, he said.
The SDF is an overnight, collateral-free deposit facility. It allows commercial banks with surplus funds to deposit their extra money with the central bank for one night to earn interest.
In the latest monetary policy, Bangladesh Bank set the private sector credit ceiling at 8.5% while the public sector ceiling was at 21.6% for June.
During a presentation on monetary policy achievement, Habibur Rahman, the deputy governor of the central bank said despite high policy rate, the liquidity market was fluid.
He said private sector credit growth, which remained sluggish due to weak demand and pre-election uncertainty, is expected to rebound after the election as investors will gain confidence.
Habibur Rahman said inflation moderated thanks to tight monetary policy and Bangladesh Bank expects gradual ease of price pressure.
Although the inflation target was not achieved, other performance indicators improved, meeting all the targets set by the IMF (International Monetary Fund), said the governor.
For instance, the governor said, Bangladesh Bank for the first time met the net reserve target set by the IMF. At the same time, high policy rate helped stabilise the exchange rate, he added.
Dollar inflow increased due to high policy rate which helped turn the financial account into surplus from deficit which ultimately contributed to rebuild foreign exchange reserves, said the governor.
'Excess govt borrowing will hinder private sector growth'
The governor said that the government has been borrowing exceeding the limit due to low revenue and high budget expenditure. If the government continues to borrow excess, it will hinder private sector growth.
"We need coordination with the government for monetary management as excessive borrowing will make monetary management difficult for Bangladesh Bank," he said.
Although the private sector credit appetite is low, high demand from the government discouraged banks to lend to the private sector, he added.
The MPC (Monetary Policy Committee) observed that if the government implements the salary increase for public sector employees as recommended by the National Pay Commission 2025 without a significant increase in revenue collection, it would have to rely on deficit financing. This, in turn, would put pressure on the money market and could lead to higher interest rates across the financial system.
Therefore, the government should take appropriate revenue measures to mitigate the impact of new pay scale implementation on the money market, according to the MPC resolution.
The 9th National Pay Commission has proposed a 100% to 147% salary increase for government officers and employees under a new pay structure, setting the minimum salary at Tk20,000 and the maximum at Tk160,000.
Pubali Bank Managing Director and CEO Mohammad Ali said, "Due to high inflation, the central bank has kept the policy rate at 10%. We had expected the policy rate to come down, with inflation falling close to 8% or below, but that has not happened. The central bank's stance on the policy rate has probably been taken after careful research."
He said, "If the policy rate were reduced, it could have played a more positive role in expanding business and trade in the economy. Moreover, private sector credit growth has been set at 8.5 percent. Reaching this target will be somewhat difficult, because even if the target is not met in the first six months of the year, it seems likely that it would have to be achieved in the latter six months – from July to December."
Mohammad Ali added, "The more corruption there is in a country, the higher inflation tends to rise. So inflation cannot be controlled by the policy rate alone. The stance taken on the policy rate is aimed at combating inflation, and the impact of inflation is being felt by 180 million people."
'Did not feel any pressure during the interim government'
Bangladesh Bank Governor Ahsan H Mansur has said he did not feel any pressure from the government while discharging his duties during the interim government's tenure.
The governor said, "While performing my responsibilities as governor during the interim government, I did not feel any pressure from any quarter. Rather, there was operational freedom and no interference. This can be stated unequivocally."
He said, "However, despite submitting several laws to the government, they were not implemented. One of these was the Bangladesh Bank Order. It was sent to the Ministry of Finance in October for finalisation, but despite having sufficient time, it could not be implemented. This can be termed a failure, because it should have been done."
He added, "The second was the Bank Company Act. This is also a very important law. We had thought the current government would be able to implement it, but that did not happen. Therefore, we would hope that whichever government comes next will honour the commitments it made in its election manifesto regarding financial development."
The governor said, "We will place this issue before the next government, because it should be done in the national interest. If it is not implemented, the misuse and looting of the banking sector seen in the past could return. Therefore, the Bank Company Order must be implemented as a permanent shield. Central banks around the world are protected in the same way."
He said, "Politicians want to stimulate the economy quickly in the short term, while the responsibility of the central bank is to ensure sustainable development."
He also said, "$4.5 billion has been purchased from the market. As a result, more than Tk50,000 crore has been injected into the market from the central bank. This purchase has helped build up reserves. Will we remain dependent on the IMF? No. Even in reserve building, the central bank is not dependent on the IMF."
Banks working with 12 law firms for asset recovery
The governor said that banks in the country are working with 12 foreign law firms to recover money that was siphoned out of the country.
The governor said, "To recover funds that were laundered out of the country, banks have contacted 12 foreign law firms. Banks are working with these foreign law firms and providing them with various information. Investigations are now underway to determine whether cases can be filed on the basis of the data being supplied by the banks, and whether we can win these cases."
He added, "These law firms will identify where the money is hidden abroad. From the recovered funds, the law firms will receive a percentage. If they recover Tk100, they will take Tk20, and we will receive Tk80."
He said he believes efforts to recover the siphoned-off money will continue under the next government, adding, "If the government does not provide support, then there is nothing that can be done."
