Bangladesh's Monetary Policy for H2 2025: Controlling inflation and strengthening banking sector
As Bangladesh faces persistent inflation, exchange rate volatility, and a fragile banking sector, the central bank's latest monetary policy aims to restore stability through tightened fiscal measures, banking reforms, and controlled liquidity
On 10 February 2025, the Governor of Bangladesh Bank announced the monetary policy for the second half of 2025, covering the period from January to June 2025. As Bangladesh grapples with high inflation, a volatile exchange rate, and a banking sector under stress, the Monetary Policy Statement (MPS) outlines a series of measures aimed at restoring macroeconomic stability and fostering long-term growth. While the path ahead is fraught with challenges, the policy framework reflects a commitment to reform and resilience.
Inflation remains a significant concern, with the headline rate hovering above 9% for an extended period. The MPS acknowledges the delayed and inadequate policy responses in previous periods, which exacerbated inflationary pressures.
However, the recent moderation in inflation, particularly in food prices, offers a glimmer of hope. The central bank's decision to maintain a tight monetary policy stance, keeping the policy rate unchanged at 10%, is prudent. This approach, coupled with fiscal consolidation and supply-side measures, is expected to bring inflation within the target range of 7-8% by the end of FY25.
The banking sector remains a critical area of concern, with rising non-performing loans (NPLs) and liquidity constraints posing significant risks. The MPS outlines a comprehensive reform agenda, including the establishment of task forces to address asset quality, enhance governance, and recover stolen assets.
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The proposed Bank Resolution Act and Deposit Insurance Act (Amendment) are crucial steps towards resolving distressed banks and restoring public confidence. However, the success of these reforms will depend on their effective implementation and the political will to enforce stringent regulatory measures.
MPS H2 2025: Interest rate targeting framework
In the context of an interest rate targeting framework, there is no necessity for an explicit focus on monetary and credit projections. Nonetheless, it is essential to align the interest rate target to promote price stability and safeguard financial stability.
The management of reserve money and the growth of broad money will be achieved by setting a target for the policy interest rate and regulating liquidity through an interest rate corridor. This approach is designed to keep the interbank call money rate close to the policy rate, particularly within the established policy rate corridor.
The latest financial data and projections for the period from June 2024 to June 2025 reveal a strong and resilient economy, with significant growth across key indicators such as net foreign assets, domestic credit, and broad money supply. Let us conduct a comparative analysis of the actual figures for June 2024 and the projections for June 2025, highlighting trends and their implications for the economy.
Net foreign assets (NFA): A strong recovery
Net foreign assets (NFA) are projected to grow significantly, from Tk316,728 crore in June 2024 to Tk341,116 crore by June 2025, marking an increase of Tk24,388 crore. This recovery is particularly noteworthy given the dip to Tk270,849 crore in December 2024, with a projected rise of Tk70,268 crore from December 2024 to June 2025. This rebound suggests an improvement in the country's external position, driven by higher remittances, export growth, and stable foreign exchange reserves.
A current account surplus means a country is earning more from exports, income, and transfers than it is spending on imports and foreign obligations. Conversely, a current account deficit indicates that a country is spending more than it earns, which is financed by borrowing from abroad or selling domestic assets to foreign investors, thereby reducing NFA.
The financial account also affects NFA. For example, if a country attracts significant foreign investment, its external liabilities increase, which may reduce NFA unless offset by asset acquisitions.
The change in NFA over time is approximately equal to the current account balance plus the capital account balance (which includes capital transfers and non-produced, non-financial assets). This is because the current account reflects net lending or borrowing from the rest of the world, while the capital account reflects changes in ownership of fixed assets.
During July-December 2025, the trade balance is projected to be negative by USD 9,764 million. To achieve the target NFA, the current account and the capital and financial account should grow by Tk70,268 crore (USD 5.5 billion) from January to June 2025. Remittances remain the primary means of achieving this goal in the short term. However, the current political situation, an exchange rate misaligned with supply and demand, and lower bilateral commitments are likely to hinder progress.
Net domestic assets (NDA): Steady expansion
Net domestic assets (NDA) are expected to grow from Tk1,631,684 crore in June 2024 to Tk1,770,377 crore by June 2025, reflecting an increase of Tk138,693 crore. While the growth from December 2024 to June 2025 is relatively modest at Tk13,055 crore, the overall trend indicates sustained domestic economic activity supported by public and private sector investments.
Domestic credit: A surge in public sector borrowing
Domestic credit is projected to rise sharply, from Tk2,115,536 crore in June 2024 to Tk2,358,822 crore by June 2025, an increase of Tk243,287 crore. This growth is driven by both public and private sector credit expansion.
Credit to the public sector: Public sector credit is expected to grow from Tk424,877 crore in June 2024 to Tk499,231 crore by June 2025, an increase of Tk74,353 crore. This reflects the government's continued focus on infrastructure development and public investment.
Credit to the private sector: Private sector credit is projected to rise from Tk1,641,240 crore in June 2024 to Tk1,802,081 crore by June 2025, an increase of Tk160,841 crore. This indicates robust private sector activity, driven by industrial expansion, consumer demand, and business confidence.
Given the current political situation and persistent inflation, investor confidence may remain subdued, as observed in previous data. Consequently, public sector credit is likely to increase further to manage domestic debt servicing.
Reserve money, broad money, and the money multiplier
Broad money supply, a key indicator of liquidity in the economy, is projected to grow from Tk2,033,232 crore in June 2024 to Tk2,204,023 crore by June 2025, an increase of Tk170,791 crore. From December 2024 to June 2025, broad money is projected to grow by Tk149,780 crore. This growth suggests a healthy expansion in monetary aggregates, supporting economic activities and reflecting increased financial intermediation.
Reserve money, which includes currency in circulation and bank reserves, is expected to rise from Tk413,645 crore in June 2024 to Tk417,781 crore by June 2025, an increase of Tk4,136 crore.
The money multiplier, which measures the banking system's ability to generate credit from the monetary base, is projected to rise from 4.92 in June 2024 to 5.28 by June 2025. This increase reflects greater efficiency in the financial system and a higher capacity for credit creation, which is essential for sustaining economic growth. However, based on a 5.28 times money multiplier, reserve money should ideally increase by Tk28,367 crore from January to June 2025. A further rise in reserve money may exacerbate inflationary pressures.
Impact on short-term liquidity and interest rates
The central bank has decided to maintain its contractionary monetary policy stance to control inflationary pressures and reduce exchange rate volatility. The target range of 7.0–8.0% will be upheld by keeping the policy rate unchanged.
As of December 2024, excess market liquidity stood at Tk215,002 crore, with central bank liquidity support at Tk117,533 crore. If the central bank reduces liquidity support or shortens the repo tenor, the market repo outstanding could decrease by an average of Tk35,134 crore, potentially pushing short-term interest rates higher. Otherwise, by June 2025, excess market liquidity is expected to hover around Tk197,866 crore, with interbank call borrowing rates ranging between 8.50% and 10.50%.
Mohammad Shahazadul Alam Khan is the head of Asset Liability Management at a reputed private commercial bank.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
