Pumping higher volume of reserve money into banks adds to inflation

A resurgence in funnelling reserve money into the market through cheap state credits to banks and dollar buy from them through regulatory intervention is stoking fears of higher inflationary regime ahead.

Under a persistently tight monetary-policy regime espoused by the central bank to contain growing inflation, the inflow of the inflation-fuelling reserve money dropped to a negative growth of 0.12 per cent even in June last. Since then, in a rebound, it has risen significantly in recent months, which money- market analysts believe largely contribute to the upward trajectory of inflation over the last several months.

Apart from the regular liquidity-feeding instruments of the Bangladesh Bank (BB), they say, the flow of subsidised credits or money injection through irregular arrangements keeps rising in the money market, which is contradictory to the spirit of contractionary monetary-policy stance.

As a matter of fact, the BB-guided tight monetary policy is not transmitting into the money market properly and not being able to contain the inflationary pressure at the expected level, which ultimately hurts common people through curtailing their purchasing power.

According to latest BB data, the growth of the reserve money in the post-June period stood at 2.52 per cent, 1.25 per cent, 3.47 per cent, 3.15 per cent, 4.35 per cent, 9.23 per cent and a steep 10.37 per cent in July, August, September, October, November, December and January last respectively.

Reserve money is the total amount of currency in circulation plus commercial banks' deposits held at the central bank, acting as the foundation for the entire monetary system. It is also called "high-powered money" because it forms the foundation for the expansion of bank deposits through the money-creation process.

Seeking anonymity, a BB official says the central bank, in fact, did nothing to control the higher inflation apart from continuing a higher policy rate of 10 per cent since October in 2024.

He says, "The volume of quasi-fiscal activities by the BB through which commercial banks avail credits from the regulator at subsidised rates, ranging from 0.5 per cent to 5.0 per cent, is still quite large."

On the other hand, the central banker adds, regular government borrowing from the central bank through using ways and means, amounting to maximum Tk 120 billion, and overdraft worth maximum Tk 120 billion, goes on to operate some 119 accounts at 8.0 per cent and 9.0 per cent respectively.

About the upturn in reserve money, the central banker informs that they had planned to downsize the ceiling of ways and means and overdraft but high-ups of the regulator turned down the proposal in view of the current macroeconomic context of the country.

"Certainly, it (reserve money growth) is a concern for all of us because it fuels inflation to some extent," he told The Financial Express.

The rate of inflation keeps rising for the last four consecutive months since October last. According to the data with Bangladesh Bureau of Statistics (BBS), headline inflation reached 8.29 per cent, 8.49 per cent, 8.58 per cent and 9.13 per cent in November, December, January and February last. However, the rate came down to 8.71 per cent in March last.

Apart from growing government bank borrowing and quasi-fiscal activities, Director-General of Bangladesh Institute of Bank Management (BIBM) Dr Md. Ezazul Islam notes, the regulator keeps injecting high-powered money in the form of assured repo (AR) against special bonds meant for settling accumulated arrears to independent power producers and fertiliser suppliers since February in 2024.

On the other hand, the economist says, the central bank has purchased more than $5.50 billion since July 13 last to stabilise the exchange rate and injected huge volumes of money into the market. "These all factors contributed to the rising growth of reserve money. But it is still not very harmful. If it rises further, it will be an issue of serious concern in the context of a tight monetary stance."

Founding chairman of Policy Exchange Bangladesh M Masrur Reaz says the rising growth of reserve money largely explains why the upward trajectory of inflation for the last four months here.

"It needs to be controlled because it is not such a policy to support tight monetary policy and efficient inflation management," he suggests.

However, given the ongoing fuel oil crisis in the wake of the Middle East crisis, the situation in the upcoming months, as far as inflationary pressure is concerned, remains very much fluid.

Finance and Planning Minister has already warned of rise in prices of most commodities in the coming days because of the soaring fuel oil prices.

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