High inflation to persist in Bangladesh amid policy challenges

A global rating agency has warned that inflation in Bangladesh will remain persistently high despite the central bank keeping its policy rate unchanged at 10 per cent.

“We maintain our view that inflation will stay above its (Bangladesh Bank) new target of 7.0-8.0 per cent (previously 6.5 per cent), and the Bangladesh Bank (BB) will hold its rate until the end of June next year,” Fitch Solutions said.

Fitch Solutions noted that ongoing political uncertainty will fuel inflation expectations, keeping inflation above target until June 2025.

The agency also expressed scepticism about the central bank’s inflation forecast.

“We think the Governor’s 5.0 per cent average inflation forecast for the next fiscal year (2025-26) is too optimistic.”

Fitch Solutions, a research platform within the Fitch Group, provides in-depth analysis of country and industry risks.

In its latest outlook, the firm revised its inflation projection for Bangladesh.

“We now expect headline inflation to average 8.5 per cent in FY2025-26, up from our previous estimate of 8.0 per cent.”

Governor Dr. Ahsan H. Mansur, however, remains optimistic that inflation will decline to 6.0-7.0 per cent by June, allowing Bangladesh Bank to start cutting rates within FY2024-25.

Fitch Solutions disagreed, saying, “We think this is unlikely.”

Instead, it recommended a further depreciation of the Bangladeshi taka, saying: “We expect the taka to depreciate another 15 per cent in 2025.”

The agency cited two key reasons for this expectation.

First, the central bank has shifted from a crawling peg to a market-determined reference exchange rate.

Second, the US Federal Reserve is now expected to cut interest rates by 50 basis points less than previously forecast in 2025.

While increased agricultural output, lower oil prices, and recent monetary tightening could help ease inflationary pressures, the agency said these factors would likely be insufficient to offset the negative effects of a sharp currency depreciation.

Given Bangladesh’s economic outlook, another rate hike is unlikely.

“Recent monetary tightening has already slowed private sector credit growth to 7.3 per cent in December, the lowest since at least 2015,” it said.

Moreover, wage growth is lagging behind inflation, leading to real wage losses and stagnant consumer spending.

“As such, we will probably revise down our 5.5 per cent GDP growth forecast for 2025, which is already below the historical average.”

The report also suggested that general elections in Bangladesh might be held earlier than previously expected.

“The interim government has announced that general elections will likely take place in FY2025-26, rather than in FY2026-27 as we previously assumed.”

This development is significant, Fitch Solutions noted, because Bangladesh has a history of political unrest around elections.

 “These traditional tensions will be heightened by competition between new political parties and existing ones, such as the Bangladesh National Party.”

The agency warned that the economic disruptions it had originally expected in FY2026-27 are now likely to occur in FY2025-26.

Combined with high inflation expectations, this will keep inflation elevated.

“For what it’s worth, the past three elections have been followed by a rise in inflation that typically lasts for about one quarter,” the report added.

Beyond domestic political risks, Fitch Solutions also highlighted potential challenges from US policy shifts under a possible Trump administration.

 A stronger US dollar and increased trade policy uncertainty could tighten global financial conditions, putting pressure on emerging market currencies, including the Bangladeshi taka.

This could further complicate Bangladesh Bank’s efforts to bring down inflation and transition to a more flexible exchange rate regime.

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