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Spreads for both bank advances and deposits are finally uncapped in central bank's revised bid to allow free movement of lending rates through bending regulatory intermediation.
Intermediation-driven spread limit was seen by bankers and some economists as one of factors for distortions on the money market.
Bangladesh Bank (BB) now lifts the intermediation spread limit in a bid to allow movement of the lending rate freely, officials said.
Earlier in 2018, the central bank issued a circular setting the maximum intermediation spread limit at 4.0 per cent, which means the difference between the weighted average deposit and lending rates will be pegged to 4.0 per cent.
Talking to the FE, BB spokesperson Md Mezbaul Haque said there was maximum intermediation spread limit of 4.0 per cent between the weighted average deposit and lending rates. For example, if the weighted average deposit rate is 6 per cent, the weighted average lending rate will have to be 10.0 per cent, which runs against free movement of the lending rate.
"That's why the central bank scrapped the spread ceiling to ensure free movement of the lending rate," he said about the unfettering of bankers from restrictive brackets in their operations.
Another BB official mentions that the central bank has introduced a market-based reference rate known as SMART ((six-month moving average rate of treasuries) through which the banks are fixing the lending rate.
"And SMART itself a cap. So, there is no need for another ceiling. That's the reason behind the withdrawal of the intermediation spread rate," he says.
The central banker also says the BB, as part of its inflation-combating steps, keeps raising the policy rate to squeeze credit supply on the money market.
As a result, the lending rate keeps increasing in a faster way but the deposit rate is not increasing at the same pace.
"If the spread limit is in place, the lending rate will not be enhanced to the level that actually helps bring down the rate of inflation to the target of the BB," the official adds about the process of backpedaling.
According to the BB sources, the central bank plans to cut the inflation down 8.0 per cent by December and 6.0 per cent by June, 2024.
Few days ago, the BB raised the policy rate again by 50 basis points to 7.75 per cent while enhancing the margin of SMART by 25 basis points to 3.75 per cent.
With the latest revision, the whole structure of the IRC (interest rate corridor) has also been revised upward accordingly as the policy rate stands in the middle of the corridor.
It means, the BB sources said, the standing lending facility (SLF), which is the upper ceiling of the IRC, gets enhanced by 50 basis points to 9.75 per cent while the floor of the corridor called standing deposit facility (SDF) revised to 5.75 per cent from the existing 5.25 per cent.
Not only the IRC, according to the decision, the margin of SMART rate, through which the banks fix their maximum lending rate, gets expanded by 25 basis points to stand 3.75 per cent instead of the existing 3.50 per cent.