In a strategic move for the next six months (H2) of the current financial year (FY24), Bangladesh Bank is likely to introduce a crawling peg system to exert control over the monetary policy. Simultaneously there is a looming possibility of an increase in the policy interest rate, making borrowing more expensive.
A crawling peg is a type of exchange rate system where a countrys currency is allowed to fluctuate within a certain range, and the central bank makes periodic adjustments to the peg based on economic indicators. This approach provides a degree of flexibility while still maintaining some stability in the exchange rate.
On the other hand, the primary objective of raising policy rates is to curb inflation. The anticipated rise in interest rates extends across various sectors, including bank loans, in a bid to foster a contractionary trend. The policies will persist, ensuring stability in other financial domains.
The formal announcement of these monetary policies is scheduled for Wednesday. The draft policy, endorsed during the central bank board meeting on January 14, is poised to navigate the financial landscape for the second half of the fiscal year.
Despite the imminent announcement, sources indicate that the dollar exchange rate will not be entirely market-driven. The persistent dollar crisis has prompted the governor to intervene, mandating the control of the dollar market through the crawling peg system.
An official from Bangladesh Bank emphasized that the upcoming monetary policy, slated for release on January 17, will prioritize inflation control, prompting adjustments in existing policies. The contractionary measures initiated by Bangladesh Bank will persist until the inflationary targets are met.
Economist Sadiq Ahmed, Director General of Bangladesh Institute of Development Research (BIDS), Binayak Sen, and Chairman of the Economics Department at Dhaka University, Masuda Yasmin, are key members of the monetary policy committee overseeing the formulation of these crucial financial strategies.
In the just concluded first half monetary policy the policy rate or repo rate is 7.75 per cent. On the other hand, with a 4 per cent corridor rate the standing lending facility rate is 9.75 per cent and the standing drawing facility rate is 5.75 per cent. The bank rate is unchanged at 4 per cent.
In the first half, the central bank introduced a SMART Plus system under which six- month moving average rate of treasury bills are counted as base rate.
