Modernisation of monetary policy framework

In the process of monetary policy formulation, Bangladesh Bank (BB) has been relying on the monetary targeting approach since its independence, to achieve the ultimate goal of price stability along with financial stability and supporting growth. The possibility of achieving success in maintaining price stability under the monetary targeting framework became very difficult, mainly due to changes like the money demand function resulting from financial innovation, the digital payment system, and the integration of Bangladesh’s economy with the global economy. As Bangladesh’s economy is strongly growing and equally integrating with the worldwide economy, the financial market has been developing and becoming more complex. In this context, a forward-looking strategy and an interest rate targeting monetary policy would be more effective for ensuring macroeconomic stability and promoting financial development. Therefore, BB adopted the interest rate targeting monetary policy framework to have an efficient monetary transmission mechanism to support the monetary policy objective of price stability and economic growth trajectory from July 2023 onward.

Policy Measures taken by BB under Modernisation of Monetary Policy

Policy initiatives for operationalisation of Interest Rate Corridor (IRC)

(I) On July 1, 2023 BB introduced a Interest Rate Corridor (IRC) where overnight Repo rate replaced by Policy rate and re-fixed at 6.50 per cent. The upper limit of this IRC is named as Standing Lending Facility (SLF) and replaced Special Repo rate which was re-fixed at 8.50 per cent. Moreover, the lower limit of IRC named as Standing Deposit Facility (SDF) and replaced the Reverse Repo rate which also re-fixed at 4.50 per cent.  

(II) On October 5, 2023 BB re-fixed its IRC by increasing all the rates by 75 per cent basis points. After the increase Policy rate, SLF and SDF stand at 7.25 per cent, 9.25 per cent and 5.25 per cent respectively.

(III) On November 26, 2023 BB re-fixed its IRC by increasing all the rates by 50 basis points. After the increase Policy rate, SLF and SDF stand at 7.75 per cent, 9.75 per cent and 5.75 per cent respectively.

(IV) On January 17, 2024, BB re-fixed its IRC by increasing the policy rate by 25 basis points, from 7.75 per cent to 8.00 per cent. At the same time, the band width of the IRC was narrowed from ±200 basis points to ±150 basis points by Reducing SLF rate by 25 basis points from 9.75 per cent to 9.50 per cent, and increasing SDF rate by 75 basis points from 5.75 per cent to 6.50 per cent.

(V) On May 8th, 2024 to tame down the uprising inflation, BB re-fixed its IRC by increasing all the rates by 50 basis points. After the increase Policy rate, SLF and SDF stand at 8.50 per cent, 10.00 per cent and 7.00 per cent respectively.

(VI) On August 25, 2024, following the Monetary Policy Committee‘s decision to continue raising the policy rate until inflation reaches the desired level, BB increased all IRC rates by another 50 basis points. After the increase Policy rate, SLF and SDF stand at 9.00 per cent, 10.50 per cent and 7.50 per cent respectively.

(VII) On September 24, 2024, BB further re-fixed its IRC by increasing all rates by 50 basis points. After the increase Policy rate, SLF and SDF stand at 9.50 per cent, 11.00 per cent and 8.00 per cent respectively.

(VIII) On October 22, 2024, BB re-fixed its IRC once again, raising all rates by 50 basis points. After the increase Policy rate, SLF and SDF stand at 10.00 per cent, 11.50 per cent and 8.50 per cent respectively.

(IX) Finally, on March 4, 2025, to provide liquidity flexibility and financial support to all scheduled banks (including Islamic banks), BB reduced the daily Cash Reserve Requirement (CRR) by 50 basis points, from 3.50 per cent to 3.00 per cent, while keeping the bi-weekly average CRR unchanged at 4.00 per cent.

Policy initiatives for streamlining Open Market Operations (OMOs)

(I) Since August 2023, BB has provided unrestricted access to the Standing Deposit Facility (SDF) and Standing Lending Facility (SLF) along with the full allotment of the repo facility for all banks and non-bank financial institutions based on their demand.

(II) Since July 2024, BB introduced Central Bank Repo auctions twice a week, on Mondays and Wednesdays (or the next working day in case of a holiday), replacing the previous practice of daily auctions, while the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) remained available daily at prevailing rates.  

(III) To enhance the effectiveness of monetary policy transmission within the framework of the Interest Rate Corridor (IRC) of monetary policy of BB, the following structural reforms in Open Market Operations (OMOs) has been implemented:

• Starting from November 1, 2024, the practice of conducting repo auctions twice a week has been replaced with a single weekly auction (7 days, 14 days, and 28 days) held once a week, on Tuesdays. If Tuesday is a holiday, the auction will be rescheduled to the next working day.  
• The Reserve Maintenance Period (RMP) for Cash Reserve Requirement (CRR) has been aligned with a one-week maintenance cycle to synchronise with OMO operations. To eliminate liquidity crunch on RMP it has been decided to introduce fine tuning overnight OMOs.
• It was assured that the SLF and SDF available on a daily basis to support liquidity management in line with the IRC framework.

(IV) To sterilise the additional liquidity injected through Lender of Last Resort to ailing banks, BB introduced 90-day and 180-day BB Bill operations along with existing 7-day, 14-day, and 30-day BB Bills from November 2024.

(V) To enhance the monetary policy framework and strengthen liquidity management, the daily minimum Cash Reserve Ratio (CRR) has been reduced from 3.5 per cent to 3.0 per cent, effective March 5, 2025. The bi-weekly average CRR requirement remains unchanged at 4.0.

(VI) To eliminate the interest rate differential in term repos, it has been decided to conduct all term repo auctions at the policy repo rate. This decision has been implemented from 09th March 2025.  

(VII) To further enhance the efficiency of the interbank money market and strengthen liquidity management, it has been decided to discontinue all repo operations except the 7-days and overnight tenors. In this regard, the 28-day repo facility has been discontinued with effective from April 10, 2025, and the 14-day repo facility will be phased out from July 2025.  

Forward-looking OMOS streamlining

• Assured Liquidity Support (ALS) facility is proposed to be discontinued effective June 2025.
• Intra-Day Liquidity Facility (IDLF) will be introduced shortly to support smooth settlement of OMOs.
• Assured Repo (AR) operations against special-purpose treasury bonds, as well as capital market repo operations, are planned to be phased out in the near future.

Policy Initiatives to stabilise the foreign exchange market

(I) Bangladesh adopted fixed exchange rate regime since its independence and continued until May 30, 2003 with occasional adjustment to maintain export competitiveness.  

(II) Effective from May 31, 2003 Bangladesh floated its exchange rate and followed a market based exchange rate for Taka. Under this arrangement, exchange rate was determined on the basis of demand and supply of the respective currencies.

(III) For avoiding unusual volatility in the exchange rate Bangladesh Bank may purchase and sell US Dollar as and when it deems necessary to maintain stability in the foreign exchange market.

(IV) Up until April 2022, the Bangladesh Taka (BDT) maintained a stable rate of 86.45 BDT/USD, reflecting Bangladesh Bank‘s active intervention.  

(V) During the height of the pandemic, BB frequently sold foreign currency to stabilise the Taka. Over FY22, FY23, and FY24, BB‘s net sales of foreign currency totalled US$ 7.4 billion, US$ 13.4 billion, and US$ 9.4 billion, respectively, showing increased intervention to support the currency. However, this intervention contributed to a depletion of foreign reserves, prompting Bangladesh to adopt a gradual depreciation strategy.

(VI) Recognising the un-sustainability of an overvalued BDT, BB allowed gradual depreciation, which amounted to 9.3 per cent in FY22, 11.84 per cent in FY23, and 10.14 per cent in FY24.

(VII) In order to bring more flexibility in the foreign exchange market, BB implemented a crawling peg system on May 8, 2024. This interim arrangement was anchored to a currency basket with a mid-rate aligned with the Real Effective Exchange Rate (REER) Index. Under this system, the Crawling Peg Mid Rate (CPMR) was set at Tk. 117.00 per US dollar and allowed market participants to trade around this mid-rate.  

(VIII)  Following the introduction of the Crawling Peg Exchange Rate System, Bangladesh Bank implemented a ±1 Taka band around the Crawling Peg Mid-Rate (CPMR) (BDT 117/USD), effective from May 9, 2024. It allowed interbank foreign exchange transactions within a defined range, facilitating a gradual market adjustment to the new regime.  

(IX)  Following the initial implementation of a ±1 Taka band around the Crawling Peg Mid-Rate (CPMR) (BDT 117/USD) on May 9, 2024, BB further widened the band to ±2.5 per cent, effective from August 19, 2024. The widening of the band was aimed at enhancing the efficiency of the foreign exchange market, reducing distortions, and supporting the transition to a more marketoriented exchange rate regime.

(X) On December 30, 2024, the Governor of Bangladesh Bank announced an upward revision of the Crawling Peg Mid-Rate (CPMR) from BDT 117/USD to BDT 119/USD, effective January 1, 2025. The band of ±2.5 per cent around the CPMR was remained unchanged.

(XI)  In order to enhance market-driven foreign exchange operations, BB allowed authorised dealers (ADs) to freely negotiate foreign exchange rates with customers and other dealers, ensuring greater flexibility in currency transactions since December 31, 2024.

(XII)  BB started to publish a daily reference benchmark exchange rate from January 12, 2025, which was calculated as the weighted average of freely quoted exchange rates from market transactions.

(XIII)  On February 9, 2025, BB decided that spot exchange rates may vary from transaction to transaction in a business day, subject to movement within the prescribed band of the crawling peg mid rate, as guided by BB from time to time.  

To bring wider flexibility in exchange rate management, it has been decided to repeal the previous circular in which it was instructed that Authorised Dealers (ADs) may apply a maximum of One Taka as spread between buying and selling foreign currencies as well as to maintain uniformity irrespective of the size for all buying and selling transactions of a business day. Accordingly, FE Circular No. 38 dated 31 December 2024 was made operational which allowed ADs to purchase and sell foreign currencies from/to their customers and other dealers at freely negotiated rates.

Dr Md Omor Faruq, Additional Director, and Mr Mahmud Salahuddin Naser,

Director, Monetary Policy Department; Dr Md Ezazul Islam, Executive

Director, Bangladesh Bank. ezazbb@gmail.com

The piece is originally published as a policy note in the

Monetary Policy Review 2024-25. www.bb.org