Loans stall, prices rise: Where are interest rates headed?

Inflation rate eased slightly to 8.26% in August from 8.32% in July, according to the Bangladesh Bureau of Statistics. That sounds like relief, but it is not. Non-food inflation rose to 9.32%, even as food inflation slipped to 7.02%. Prices also rose 2.31% month-on-month in August, with food up 3.86%.

The ground is shifting again. The government has raised fuel prices by up to 17.4% in diesel, and the new rates effected from 1 October 2026. Retail prices of all major fuels went up by Tk20 per liter from midnight on 20 September. Economists have long warned about the chain that follows: costlier diesel raises transport costs, then wholesale prices, then retail prices, and the process is not instantaneous.

For businesses, higher input costs are only one side of the squeeze. The other is the cost of money itself. The weighted average lending rate of scheduled banks stood at 11.86% in June 2026. With diesel, gas and imported raw materials all costing more, few entrepreneurs want to add expensive debt to the pile or provide utmost effort to reduce the financial costing at rollover time or are reluctant to borrow.

The numbers show the result. Private sector credit growth fell to 4.47% at the end of June 2026, the lowest in 33 years, before rising slightly to 4.62% in July 2026. That was only about half the central bank's target of 8.5%. The investment slowdown is showing up in the national accounts as well: private investment fell from 24.18% of GDP in FY2022–23 to 21.53% in the fiscal year just ended. Bangladesh's August Purchasing Managers' Index (PMI) stood at 49.9, reflecting near-neutral economic activity. 

A reading above 50 generally indicates expansion, while a reading below 50 indicates contraction. Contractions in manufacturing and services were offset by expansion in agriculture and construction.

Bankers say they are seeing it at the counter. Businesses are not drawing on the central bank's stimulus package funds because demand for new loans remains weak.

When demand for loans is this thin, borrowers have leverage. Those who do borrow are pressing banks to cut rates, and banks holding surplus liquidity have little room to refuse. The central bank has already moved. On 30 July it cut the policy rate by 50 basis points to 9.5% to support investment and credit flow. The cut has raised expectations of further easing since the liquidity is still there and might be existing up to the end of this year.

The saver does not have the same leverage. The weighted average deposit rate was 6.16% in June 2026. Set against inflation above 8%, that means a saver's money buys less each year, even though the account balance grows on paper.

Retirees and small savers who depend on interest income are the most exposed. If policy rates drift lower while prices keep climbing, that gap will widen. Financial analysts often describe this quietly as a transfer from savers to borrowers and to the state.

Then there is the government, which complicates the picture. Weak revenue and a heavy subsidy bill have pushed it to lean on the banking system. Officials said higher government borrowing needs put upward pressure on short-term rates. Bank lending to the government surged earlier in the fiscal year, and economists warn of a "crowding-out" effect, where banks prefer to lend to the state instead of to businesses.

The state is set to borrow more. The government plans to borrow an additional Tk12,471 crore from commercial banks in October, November and December, outside the scheduled borrowing calendar, and the market has taken note. Still, primary dealers may feel comfortable investing in short-term bills or bonds, pushing short-term yields lower. Long-term bond yields, however, have started to rise as short-term liquidity dries up in the market.

Gross non-performing loans as a share of total loans stood at 32.26% in June 2026, while the rescheduled loan ratio was 24.54% as of 25 December. Hence, the industry has approximately 56% of loans that are performing, and banks are fiercely competing for those customers. In this liquid market, banks may be willing to cut lending rates to capture them.

For the ordinary citizen, the message is sobering. Expect low returns on savings, high prices at the market, and a slow-moving economy. Policymakers face a narrow path that is supporting growth without letting inflation slip further, and financing the state without starving the private sector.

So the pressure is real. With weak private demand, banks have few alternatives to government bills and bonds, which could push rates lower even as inflationary pressure persists. This could create a unique yield curve in which both risk-free rates and corporate lending rates remain relatively low. However, this is unlikely to be sustainable and could ultimately push the yield curve higher once market liquidity tightens and credit demand recovers.

Behind all of this sits a global shock. Bangladesh's fuel import bill rose 107% in FY2025–26 because of the Middle East conflict. Disruptions around the Strait of Hormuz and the Red Sea have lengthened shipping routes and raised insurance premiums. These higher costs gradually spill over into economic activity, ultimately creating long-term upward pressure on the yield curve.

Current thought processes can be classified in two fold. Pushing rates down like collapsing loan demand, borrowers resisting high production costs, and a central bank that has begun to ease. Pushing rates up such as heavy government borrowing, inflation that stays stubbornly high, and currency pressure from a costlier import bill.

On balance, the first group is likely to dominate in the near term, because banks cannot lend what businesses want to borrow, leading to lower lending rates. On second thought, persistent government borrowing and high production cost will increase the long term rate when credit growth peaks up.

For the ordinary citizen, the message is sobering. Expect low returns on savings, high prices at the market, and a slow-moving economy. Policymakers face a narrow path that is supporting growth without letting inflation slip further, and financing the state without starving the private sector.

Sketch: TBS

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 author and do not necessarily reflect the opinions and views of The Business Standard.