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Bangladesh's tightfisted monetary-policy stance to continue with 10-percent policy rate until inflation drops below 7.0 per cent, the central bank announced Thursday.
During the rollout of the half-yearly monetary policy for the current fiscal year, Bangladesh Bank (BB) Governor Dr Ahsan H. Mansur said the 'tight' monetary-policy stance would continue unless the inflation is tamed down this bottom line by the end of December next.
In instant reaction, leading trade bodies in the country noted with concern that continued contractionary monetary policy would continue to dampen private investment and hurt business confidence as cost of funds remains as high as before.
Explaining the monetary policy statement (MPS) for the first half (H1) of the financial year 2025-26 at the BB headquarters, Mr Mansur said the inflationary pressure continued to fall in recent months due to the conservative monetary approach but the inflation-combat target has yet to be reached.
Under the circumstances and taking into account the global risks, he said, the BB will continue with its tight monetary policy in the first half of FY'26 to tame inflation and anchor inflation expectations.
"If the inflation rate continues to decelerate further, as we expect, the policy repo rate may be adjusted downward, if inflation rate comes below 7.0 per cent, until then, the policy repo rate will remain unchanged at 10.0 per cent," he said.
Under the unchanged monetary stance, the Standing Lending Facility (SLF) rate will remain at 11.5 per cent while the Standing Deposit Facility (SDF) rate will be 8.0 per cent.
In the latest MPS, the projection of private-sector-credit growth is lowered to 7.20 per cent until December from last June's projection of 9.80 per cent.
The central bank has pinpointed some major challenges confronting the economy-like persistently high inflation, a depreciating exchange rate, depleting foreign-exchange reserves, a buildup of external-payment arrears, tight liquidity conditions, a lack of good governance, and elevated non-performing loans (NPLs).
In response, the banking regulator has outlined clear and forward-looking strategies emphasising its strong commitment to containing inflation, stabilising the exchange rate, rebuilding foreign-exchange reserves, and restoring confidence in the banking sector through improved governance.
"Once current developments and projections consistently show a decline in inflation and the policy rate in real terms reach 3.0 per cent, BB will gradually begin to lower the policy rate," says the governor.
Asked whether the central bank is sacrificing economic growth and employment generation through a repeat of contractionary monetary, the BB governor said macroeconomic stability is a precondition for a sustainable economic growth.
Keeping this in mind, he said, the central bank has been focusing on improving the country's macroeconomic situation. Despite the approach, the country maintained over 4.0-percent economic growth, which is "perfect under the current macroeconomic context".
"We can still achieve artificially lucrative growth by injecting high-powered money like in the previous regime, which will not sustain," the former IMF-executive-turned governor under the post-uprising government told the reporters.
The banking regulator has raised the policy rate, through which the commercial banks borrowed funds from the central bank, 11 times since May 2022.
It lifted the rate to 10 per cent in October last year and continued the policy stance despite criticism from the business circles because it significantly enhanced their cost of borrowings amid persisting economic slowdown.
Responding to a question, the governor said the central bank will intervene in some 15 to 20 troubled banks in the coming days in phases.
"We are already taking steps regarding Bangladesh Commerce Bank Limited," Dr Mansur said, adding that Padma Bank is also under close observation. "Padma Bank is now almost non-functional. It needs to be made functional. It can also be merged. This will be addressed in the second phase."
In the first phase, BB plans to intervene in five banks. In the second, Padma Bank will be included along with five to ten additional banks.
"We will proceed phase by phase, depending on our capacity," the governor notes about possible mergers and acquisitions.
However, money-market experts raised question over the nature of tight monetary-policy stance because commercial banks have been allowed intensified volume of liquidity supports from the central bank in recent months.
According to BB statistics, commercial lenders borrowed Tk 1.45 trillion under the central bank repo facility alone in June last. Simultaneously, the banks received special liquidity supports amounting to Tk 817 billion in the same month.
Former lead economist of World Bank's Dhaka office Dr Zahid Hussain says the central bank probably wants to avoid possible risks of inflation buildups in the days ahead. That's why it does not take risks of squeezing policy rate.
He thinks the country got an opportunity to lessen the inflationary burden when the exchange rate was falling couple of weeks ago, but the central bank did not cash in on the opportunity and upped the dollar price through direct intervention.
Under the intervention, he says, the BB injected a good volume of liquidity through purchasing US dollars from the market. "These funds may create a fresh risk to raise inflation if the regulator does not mop up the liquidity immediately."
"I think the BB takes the right decision under the current macroeconomic context," the economist told The Financial Express.
Dr M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, thinks the BB needs to continue conservative monetary stance for another round to keep under control the higher inflationary pressure.
But it will not be sufficient if the stability in exchange rate and improvement in balance of payments are not continued in the coming days. "Otherwise, it may trigger inflationary pressure again through creating depreciation of local currency further."
About the BB liquidity feeding, he says the central bank continues providing the support because financial health of some banks is not in good shape but the injected liquidity needs to be sterilised as quickly as possible to avert possible push in inflation.
"But, the BB has to reach a logical solution to the struggling banks through consolidation, mergers and acquisitions," he told the FE.
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