a year ago

Aspects that delimit the current monetary policy

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After four years, Bangladesh Bank has resumed the practice of announcing half-yearly monetary policy statement (MPS). Since the formal introduction of MPS in January 2006, it had been issued on a half-yearly basis. Dr Salehuddin Ahmed was the governor of the central bank under whose leadership the Bangladesh Bank began declaring the monetary policy publicly, a practice that the country pursued for the given period. It was a big step foward to make the central bank's core function transparent. Dr Atiur Rahman, his successor as the BB governor, continued the practice. His successor, Fazle Kabir, also maintained the trend for three years. Later he switched to annual announcement of MPS in July 2019. The move was criticised by many, and some even viewed that the change was compromising the central bank's independence and transparency.

The incumbent, Abdur Rouf Talukder, who assumed the responsibility to lead the central bank since July last year, finally reintroduced the practice of unveiling half-yearly policy statement. His maiden MPS, announced last week for the second half of the current fiscal year (FY23), is thus noteworthy for this as well as some others also.

As a matter of fact, various stakeholders were waiting for the latest MPS at a time when the country's financial sector is going through uncertainties. For the last half year, dollar crisis has become a serious concern as foreign-exchange reserve was depleted and the taka depreciated sharply against the US dollar. Default loans increased significantly, exposing the weaknesses of some commercial banks. Islamic banks are facing shortage of liquidity and sought the central bank's intervention. Inflation is high and mass people are struggling to get essentials as their prices shot up. How the latest MPS has addressed these issues need some in-depth analyses. Economists, bankers, businesses and other stakeholders are now doing so from their own perspectives.

Before going into the analysis, it would be better to go back to the basics of monetary policy. To put it simply, monetary policy is a policy formulated by the central bank (Bangladesh Bank in Bangladesh) relating to the monetary matters of the country. The policy includes measures and steps taken to control the money supply and availability and cost of credit in the economy. The policy also determines the distribution of credit along with interest rates on lending and deposits. That's why the policy is sometimes labelled as credit policy. The main objective of the monetary policy is to maintain the stability of  price level to support the economic growth. To do so, the central bank needs to monitor and adjust the supply of money in the market so that inflation can be kept in check. The core theory is that excess supply of money can fuel inflation and ultimately destabilise macroeconomic situation.

As money is mostly transferred to people through banks and financial institutions, the central bank supervises them by applying various tools and methods. Central banks across the world largely implement the monetary policy through open-market operations, bank-rate policy, reserve system, credit-control policy, moral persuasion and through many other instruments. It is presumed that using any of these tools would lead to changes in the interest rate, or the money supply in the economy. Traditionally, monetary policy can be expansionary and contractionary in nature. Raising money supply and cutting interest rates reflect an expansionary policy whereas the reverse of this is a contractionary one. If there is a high rate of inflation, the central bank usually goes for contractionary policy to contain the consumption spree. On the other hand, if there is a low level of inflation which indicates slow pace of economic growth, central bank adopts expansionary policy to fuel aggregate demand. The level of expansion or contraction may be moderated, also meaning a mixed or compromise monetary stance.

Bangladesh Bank in the official MPS for H2 of FY23 termed it 'a cautiously accommodative policy stance' to restrain the pressures originating from inflation and exchange rate. It is also ready to support the 'desired economic growth' by 'ensuring the necessary flow of funds into the economy's productive and employment- generating activities.' Thus, the MPS acknowledges that there is an inflationary pressure and that is the main concern which is also linked to exchange-rate management. The central bank also wants to provide adequate credits for the income- generating and job-creating sectors so that the economy can attain the trimmed GDP (Gross Domestic Product) growth of 6.50 per cent in the current fiscal year. Initially, the government had set 7.50-percent GDP-growth target. Due to global geopolitical turmoil and recession, coupled with internal crisis, the target has been revised down in a pragmatic manner. Initial inflation target was set at a modest 5.60 per cent and now revised up to 7.50 per cent as prices continued to surge in the first half of the current fiscal year.

Thus, the country is going to enter a 'high inflation and low growth' territory. The core challenge for the central bank is to check the inflation by tightening money supply which implies sacrificing growth to some extent. That's why the central bank has increased repo and reversed repo rates by 25 basis points to 6.0 per cent and 4.25 per cent along with the announcement of the MPS. It also corrected the distortion in interest-rate structure partially by lifting the 6.0-per cent cap on deposit rate, along with relaxing the ceiling on consumer credit. It, however, maintains the 9.0-per cent cap on lending rate, especially for corporate and industrial credits. Keeping the lending-rate cap as it is may discourage the banks from enhancing deposit rates significantly. In that case, it is unlikely that sufficient amount of money is going into the bank vaults. Obviously, the situation won't help reduce money supply to contain inflation. This proves to be a big limitation of the latest MPS, at least for the time being.

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