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The central bank has further tightened its monetary stance by hiking the policy rate to pull down the inflationary pressure. It increased the overnight repo rate by 50 basis points to 9.50 per cent from 9.0 per cent on September 24. Thus, the policy rate was increased within a month as inflation was still high, eroding people's actual income. Bangladesh Bank, under the leadership of the new governor, decided last month to continue the contractionary monetary policy until the price level comes down to a satisfactory or optimal level. The decision was also disclosed publicly to ensure transparency in its work and provide a clear message to the financial market. The valid question, in this connection, is whether the rate hike or further tightening the money supply will bring the desired outcome. This piece has tried to find the answer.
The half-yearly monetary policy statement (MPS), announced in the second week of July this year, set a target to keep the policy (Repo) rate at 8.50 per cent, the SDF rate at 7.0 per cent, and the SLF rate at 10.0 per cent unchanged until December this year. It also set a target to bring down the rate of inflation at 6.50 per cent by the end of the current fiscal year or June next.
The MPS was announced at a critical juncture in the country when the anti-discrimination movement, launched by the students, was spreading fast, and the Hasina regime also extended its brutal repressive measures to quell the movement. The result was the mass killing of students and ordinary people across the country. As the movement turned into a mass uprising, Hasina was forced to resign and flee the country to take shelter in India on August 5. Thus, Bangladesh has witnessed the fall of a tyrant that led to a wave of changes. The Hasina-appointed central bank governor also resigned immediately and took shelter in a hideout. As Professor Muhammad Yunus became the chief adviser of the interim government, who took oath on August 8, a new governor was appointed to run the central bank. Dr Ahsan H Mansur, a former International Monetary Fund (IMF) economist, took the governorship. He has been running a think-tank in the country for more than a decade, along with two colleagues, who were also former economists of the World Bank.
The political changeover in the country has driven the central bank to look into inflation with a more serious approach. The new governor has prioritised three major tasks: curbing inflation, restructuring the banking sector and recovering money stashed away outside the country. The ousted Hasina regime has severely damaged the banking sector through massive irregularities and bad governance. The autocratic ruler also provided room for cronies to stash money abroad. These two factors have made the country's economy quite vulnerable.
As the new governor has intensified the fight against inflation, he has also stopped printing money and selling US dollars from the reserve to check the increase in the money supply and depletion of the foreign exchange reserve. The move is expected to also help reduce inflationary pressure.
Inflation, on a point-to-point basis, came down to 10.49 per cent in August last after reaching a record high of 11.66 per cent in July last. It further declined to 9.92 per cent in September. Both the food and non-food inflation at the national level also declined to 10.40 per cent and 9.74 per cent in the previous month from 11.36 per cent and 9.74 per cent, respectively, in August, according to the Bangladesh Bureau of Statistics (BBS). It is, however, difficult to gauge the role of monetary tightening on the modest decline in inflation at this moment.
The further hike in the repo rate, at which the central bank lends money to commercial banks in case of any shortfall of funds, will increase the rates of both deposits and lending. This means that banks are likely to get more deposits by offering a higher rate of return to depositors. In this process, more money will enter into the banks from the market. Banks will also disburse relatively lower amounts of loans at the same time. The interest rate on lending will increase the cost of borrowing for business people and traders. It will also help to reduce the supply of money in the market. The contraction of funds from the market will ultimately reduce the inflationary pressure to some extent. At the same time, it will increase the cost of borrowing and may slowdown the investment and hinder the resurgence of the business activities.
The repo rate was increased from 6.0 per cent to 8.50 per cent throughout FY24 to contain the inflation. The step-by-step modest hike could not effectively rein in inflation. International Monetary Fund (IMF) suggested enhancing the repo rate to 9.0 per cent by December next or the end of the first half of FY25. Monthly inflation in December last year was 9.41 per cent which increased to 9.81 per cent in March this year and slightly moderated to 9.72 per cent in June last. The new governor has taken a hawkish approach that has driven up the repo rate by 100 basis points within a month.
In economic jargon, 'hawks are seen as willing to allow interest rates to rise in order to keep inflation under control', no matter whether the move contributes to 'sacrificing economic growth, consumer spending, and employment.' Hawkish policymakers, usually the central bank heads and sometimes finance ministers, prioritise curbing inflation. Some may differ on terming the current move of the country's central bank governor to fight inflation as 'hawkish'. Nevertheless, the persistent rate hike and sacrificing the growth momentum for the time being probably remains the only option at the moment.
The latest version of Bangladesh Bank Quarterly said in this connection that the central bank continued to adopt a restrictive monetary policy, gradually raising the policy (repo) rate to curb inflation. "However, the rate of inflation remained above the comfort levels," it added.
"Moreover, disruption of supply chains resulting from the nationwide uprising led by the students' anti-discrimination movement and the recent flooding in Bangladesh could potentially impact inflation in the upcoming months," the report continued. In this connection, the report further added that the central bank is likely to maintain its contractionary monetary policy stance until clear signs of easing inflation are evident. It is also expected that both the monetary tightening coupled with various other measures taken by the interim government so far are likely to 'reduce inflation expectations and facilitate a positive impact on inflation' by the end of this year. Let's hope for the best.