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As Bangladesh government has turned to treasury bills and bonds – instead of overprinting money leading to inflation – for taking loans, its interest rate on treasury bills has exceeded 11 per cent, according to a local media report.
The central bank set the interest rate against the 364-day treasury bill at 11.20 per cent, up from 10.60 per cent, during an auction on Sunday.
At the same auction, the interest rate for the 91-day treasury bill was set at 10.80 per cent, an increase from 10.20 per cent, and the 182-day treasury bill at 11 per cent, up from 10.40 per cent.
The government had aimed to borrow Tk 35 billion for the 91-day period but ended up securing Tk 42.18 billion on Sunday, resulting in an increase in interest rates, according to sources.
For the 182-day term, it had set a target of raising Tk 15 billion, but only Tk 5.01 billion was obtained. Similarly, the target for the 364-day term was 20 billion, with only Tk 4.22 raised.
Currently, the bank loan interest rate is being determined based on the treasury bills. The method by which the interest rate is determined is called SMART or Six Months Moving Average Rate of Treasury Bills. Bangladesh Bank updates the SMART rate at the start of each month.
For December, the SMART rate is 7.72 per cent, an increase from November's 7.43 per cent and so banks can now charge interest rates up to 3.75 per cent, and financial institutions up to 5.75 per cent.
Central bank officials project that treasury bill rates may escalate to 12 per cent, affecting loan interest rates. This increase in rates is expected to curtail credit disbursements, aiding in inflation control.
The Bangladesh Bank aims to reduce inflation to 8 per cent by the end of December.
As part of this effort, the policy interest rate or repo rate has been raised by 75 basis points to 7.25 per cent since October 5, leading to a general rise in interest rates.
The latest Bangladesh Bureau of Statistics (BBS) report notes that food price inflation in October was 12.56 per cent, the highest in almost 12 years, with headline inflation slightly increasing to 9.93 per cent.