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Formal credits get further costlier for businesses and consumers as the central bank raised the policy rate by 50 basis points again in less than a month to contain inexorable inflation.
The Bangladesh Bank's belt-tightening step comes as part of its contractionary monetary stance to take the steam out of the overheated market blamed by many economists largely on price manipulation and supply-chain disarrays.
Following the latest hike, the policy or repo rate now rises to 10 per cent from the existing 9.50 per cent, with effect from October 27, according to a Bangladesh Bank circular issued Tuesday by its monetary policy department.
In line with the upward adjustment, the Standing Liquidity Facility (SLF), the upper ceiling of the interest corridor, will now rise to 11.50 per cent from the current 11.0 per cent, while the Standing Deposit Facility (SDF), the floor rate of the corridor, will increase to 8.50 per cent from the existing 8.0 per cent.
The regulatory move comes a day after the central bank squeezed the existing borrowing window through repo instrument for the commercial banks to once a week from the existing two days, which will create more pressure on the banks to efficiently manage their funds, according to the bankers.
Seeking anonymity, a BB official said the central bank adopted aggressive monetary stance to contain the inflation and it would be continuing unless the inflationary pressure eases to a "tolerable or desired level".
Amid the monetary tightening, the official said, the commercial banks will be forced to manage their portfolio in such a way as will help bring back credit discipline through focusing more on cash-recovery drives for their non-performing loans (NPLs).
Now the culture of taking low-cost funds from the BB and investing in high-yielding government securities to gain handsome returns will hopefully end and they would use their funds more carefully to remain sustainable on the market, the central banker said about merit of the monetary measure.
"It will also help encourage the depositors to come back to the banking sector as the policy-rate hike will prompt the banks to further raise the rate of deposit," the BB official said.
Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman says the BB further tightened the monetary situation with the fresh hike. A day before, the banking regulator limited the existing repo facility allowing cash supports against repo once a week from next month from existing two days.
"This is expected to reduce inflation as this is primary tool you achieve so," he says.
"So, the liquidity pressure on banks will mount further. Now, we need to make our plan better through focusing more on managing our cash position more efficiently," the experienced banker notes.
However, private entrepreneurs think the regulatory policy-rate hike in quick successions will stoke up the existing wave of concerns the private sector goes through in recent times.
President of Bangladesh Chamber of Industries (BCI) Anwar-ul Alam Chowdhury makes a point that the rate hike comes at a time when private-sector players have been passing through a situation which is not suitable for business.
He says industrial production has been severely affected because of the persisting energy crisis and ongoing unrest in the industrial belts. On the other hand, the complete resumption of business activities after the latest mass uprising is still uncertain.
Under such circumstances, he says, the frequent rise in the cost of funds will certainly put the businesses in jeopardy. "I think continuous shrinking of the industries will be the spillover effect of such gradual policy-rate hike," Mr Chowdhury, also chairman of Evince Group, says on a note of frustration.
Criticising the central bank's inflation-combat steps through monetary tightening, the business leader says the government needs to address non-monetary factors like unofficial toll collection at various points in the domestic supply chain, and growing energy and transportation costs to stabilise the price of commodities.
"I don't think controlling inflation only through the monetary lens will work. What it will cause is raise unemployment rate, which will become a serious challenge for the densely-populated economy," he adds.