Bangladesh Bank (BB) has announced a contractionary monetary policy for January-June period of 2023-24 on Wednesday placing top priority on taming inflation though it may slow down economic growth by reducing money supply to the economy.
Growth is not priority, taming inflation is the top priority, the new six monthly policy said. It would make borrowing costly and continue till inflation comes down to 6 percent, the policy statement further said.
Bangladesh Bank Governor Abdur Rouf Talukder unveils the new policy at a press conference at Bangladesh Bank head office.
He said the new policy aims at reducing private sector credit growth making borrowing costlier and borrowing by commercial banks from the central bank will also be costly to reduce money supply in the economy.
It has raised the ripo policy rate by .25 basic point to 8 percent from 7.75 paisa to reign in the money market.
Under the existing interest rate corridor of standing lending facility (SLF) the rate has been increased by 25 basis points from 9.50 percent to 9.75 percent. Simultaneously, the standing deposit facility (SDF) rate has been up by 75 basis points, moving it to 6.50 percent from 5.75 percent. That means the corridor rate has been reduced from ± 200 basis points to ± 150 basis points.
In the new policy domestic credit growth projected to be reduced to 13.9 per cent which was 15.4 percent under the outgoing policy. Categorically credit to private sector has been projected to come down to 10 per cent from earlier 11 per cent. Credit to public sector to go down by 3.2 percentage points to 27.8 per cent.
The BBs seeks to maintain a tight monetary policy in the latter half of FY24 to control inflation and anchor inflation expectations while ensuring adequate funding to the productive sectors of the economy to support desired growth.
A senior BB official said a new method in exchange rate calculation has been introduced to make forex market stable. He said, "A crawling peg arrangement will be followed from now by the central bank that will set a minimum and maximum rate."
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.
Referring existing foreign exchange market he said Bangladesh Taka (BDT) has been depreciating against US dollar since mid-2022, primarily driven by an overall balance of payments (BoP) deficit.
This depreciation has exerted pressure on the BDT/USD exchange rate, contributing to domestic inflation through increased costs of imports. In the light of this, many stakeholders have advocated for a gradual shift towards a market- based exchange rate system, implemented in phases.
However, given the significant depreciation of the BDT over the last few months, economic fundamental driven exchange rate will help increase export earnings and remittances inflows as the current exchange rate of BDT against the USD appears to be competitive, reflected through the NEER and REER-based index, the governor said.
A competitive and representative equilibrium rate is proposed to be established at the midpoint of exchange rate corridor, allowing it flexibility within these bounds.
The monetary policy states that under this arrangement, BB would retain the option to intervene to prevent the exchange rate from breaching the established band limits. A BB official said there is no alternative way to follow contactionary monetary policy at this moment.
