The Financial Express

Stimulus-induced liquidity may create inflationary pressure

| Updated: January 17, 2021 12:28:25

File photo used for representational purpose only File photo used for representational purpose only

The policy relaxations by Bangladesh Bank and low-cost refinancing lines of credit along with the government's big stimulus packages to support economic activities had already injected a big liquidity in the economy.

Such an injection of liquidity may create some inflationary pressure in the country in near future, observed the latest annual monetary policy review of the central bank.

“In the backdrop of the COVID-19 pandemic, the government of Bangladesh and BB took a series of timely and appropriate initiatives such as stimulus packages of more than BDT 1.21 trillion, policy relaxations, low cost refinance schemes, etc., among others, to support weaker segments of the economy and to ensure sufficient liquidity in the banking system,” said the review.

The central bank has released the monetary policy review after six years and posted it to its official website on Thursday afternoon. [https://www.bb.org.bd/pub/halfyearly/monetaryprev/dec20/mprdec2020.pdf.]

Analysing the trend of inflation, the review mentioned that the slow recovery in the global commodity and energy prices indicated the lower inflationary pressure from external sources.

“Besides, food inflation is expected to decline in the coming months with increased domestic production of crop and non-crop agriculture, which was reflected already in softened headline inflation in November and December 2020 driven by decreased food inflation,” it added.

The central bank analysis, however, cautioned that the recent upward trend in food inflation mainly due to supply-side disruption may ‘cause some upside risks to the headline inflation.’

“The BB will remain watchful at any such developments and will act accordingly to take the required policy action,” it added. “Prudent macroeconomic and monetary management would need to be continued to ensure that the headline inflation rate is contained in line with the targeted path.”

The annual monetary policy stance for FY21, released in July last year, stressed on keeping the annual average inflation rate within 5.40 per cent ceiling which is also the government’s target.

By applying a number of econometric techniques, the research team of the central bank earlier found that inflation rate may vary in between 5.04 per cent and 5.93 per cent in the current fiscal year.

Annual average inflation rate, based on Consumer Price Index (CPI), was recorded at 5.65 per cent in FY20. The rate was lower at 5.47 per cent in FY19.

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