Lending rate set to rise further

Lending rates are up for further rise as the regulator continues tightening its fist in a must-do combat to cool indomitable inflation and domestic-market turmoil.

Sources say the banks' lending-rate rise is set to take effect in October in a latest contraction in money supply while the Bangladesh Bank already refrained from injecting print money in the economy in September.

The action regarding the banking sector is prompted by an uptrend in the weighted average rate of 182-day treasury bills throughout September.

Officials have said the lending rate is being fixed based on the SMART (six-month moving average rate of treasuries) rate, and the average rate of 182-day T-bills increased to 7.41 per cent this month from July's 7.33 per cent.

According to the moving average of 182-day treasuries for the last six months until this September, the SMART rate would be 7.20 per cent, which is 16-basis- point higher from its August rate of 7.14 per cent.

Sources at the Bangladesh Bank said the SMART rate is set to be enhanced largely mainly because of the central bank's recent policy shift from injecting 'high-powered money' into the economy to contain growing inflation.

Seeking anonymity, a BB official said the regulator used to make market intervention with 'devolvement' mechanism on its own and meet government bank-borrowing requirements with the newly circulated money if the participating primary dealer (PD) banks placed higher bids at the auction for buying 182-day T-bills.

As the BB refrained from using development instrument as part of its inflation-checking initiative, the official said, the PDs are now placing comparatively higher rates and there is no market-controlling mechanism to make a balance.

"As a result, September's weighted average cut-off yield of 182-day T-bills shot up to 7.41 per cent, which is set to impact the SMART rate in the coming October," the central banker says explaining the exigency of rate hike to make money little hard to get by.

According to statistics available with the central bank, the net volume of devolvement carried out by the BB stood at around Tk 800 billion in the past FY'23, in a quantum leap by Tk 510 billion from the previous fiscal year's Tk 290 billion.

Starting from this ongoing fiscal, it began slowing down as the volume of high-powered money supplied by the central bank into government accounts in the form of buying government securities was equivalent to Tk 36.48 billion in July 2023.

The volume of ready money was further curtailed to Tk 16.61 billion. But, in this current month, the BB did not inject a single penny through devolvement mechanism, the BB data showed.

Another BB official says the government generally meets major part of its domestic-borrowing targets from the banking system through issuing government securities - treasury bills and treasury bonds-to make up for budget shortfalls. The banks purchased the risk-free investment instruments from the auction arranged by the BB.

The central banker says the recent trading in the auctions indicates that the SMART rate continues increasing in the coming months. Many countries around the world controls inflation by raising interest rate-and the spell continues right now.

"In that context, it is a good thing," the official adds about the money-market intervention.

On the other side of the aisle in the run of the economy, growing lending rate becomes a pain in the neck of businesses under the current macroeconomic situation that goes on experiencing turns and twists in the wake of global volatility.

A business delegation led by FBCCI president Md Mahbubul Alam recently met with BB governor Abdur Rouf Talukder and requested the governor for taking measures to stop the upswings in bank-lending rates.

Contacted about the conundrum, President of Dhaka Chamber of Commerce and Industry (DCCI) Barrister Md. Sameer Sattar said the private sector has already been under immense pressure because of multiple factors, like recent tariff hikes of power and energy, ongoing dollar dearth and frequent depreciation of the local currency against the American greenback.

"Look at the data of private-sector-credit growth, which is the lowest in recent times. If the cost of borrowing goes up further, it will be a huge burden to absorb for the entrepreneurs," the business-chamber chief says.

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