Bangladesh Bank (BB) in a major move has introduced crawling peg method in exchange rates, set market driven lending policy by replacing SMART benchmark and increased policy rates.
In this regard the central bank has instructed all the scheduled commercial banks on Wednesday to follow the newly devised policies to streamline money market and restore stability.
The BBs move came to fulfill IMFs compliance in getting the third installment of loans.
As per crawling peg system the BDT has been depreciated by Tk7 to Tk117 against per dollar in a major reshuffle raising the dollar prices by Tk7. The crawling peg is an exchange devise under which Tk117 is a mid rate corridor that allows exchange rate to go up to a maximum band and down to a minimum band.
The new market driven lending policy replaced the earlier six months moving average rate of treasury bills (SMART) benchmark.
SMART was a benchmark rate at which the banks could lend money by adding extra 3 per cent to borrowers. As per the latest BB statement the SMART benchmark rate was 10.55 per cent which means the banks could lend at Tk10.55 plus 3 per cent totaling 13.55 per cent interest on lending.
In the latest market driven lending rate move the conventional banks will fix sector basis lending rates and they may provide loans at plus minus one per cent of the fixed rates and in this regard the banks must quote in sanction letters whether it is fixed or variable rate. In the sanction letter it will also be quoted that how many times in a year the interest rates will changed.
The BB new policy also said the banks can impose maximum 1.5 per cent penalty on partial or full overdue on loans or installments and banks are barred to charge any other amount on service except declared interest.
In regard of Bangladesh Bank formed stimulus package, refinancing loans, special funds and pre financing funds the commercial banks will follow the central bank fixed rates of interests.
As per the previous instruction taken on January 25, 2012 the interest rates statement should be uploaded over Enterprise data Warehouse through Web Portal. Shariah based banks will fix their profit rates according to the instructions.
On the other hand, under the Bangladesh Banks introduction of crawling peg system for exchange rate for spot purchases and sales of US dollars the Crawling Peg Mid Rate (CPMR) has been fixed at Tk117 per dollar. It means it is a mid rate and there will be a corridor of upper and lower limits. For an example the buying and selling will be on the basis of Tk117 plus or minus 2 per cent of Tk117 mid rate as a corridor.
This means if increased it will Tk117 plus 2 per cent of Tk117 that is Tk117 and Tk2.34 total Tk19.34 against a dollar. And on the other hand, if decreases it will be Tk117 minus 2 per cent of Tk117 that is Tk114.66.
At this the purchase and selling will follow an upper and lower band. When asked the BB spokesman Mejbaul Haq said, "We will fix the Plus-Minus band corridor after assessing the market for few days.
When contacted experts hailed the new move saying the lending rates should be left to market forces.
Professor Mustafizur Rahman, distinguished fellow at the local think-tank Centre for Policy Dialogue (CPD) said, "There could be a primary shock but it will be settled."
Former BB governor Saleh Uddin Ahmed said the central bank has to go beyond IMF prescription and stereotyped policy recommendations.
Regarding CPMR a senior banker working with a private commercial bank said, "The the newly devised exchange rate policy is near free market flow."
He said, "Though it is not fully market oriented, for the time being, it is effective and gradually the central bank may unleash control."
The Bangladesh Bank also raised policy rate by 50 basis points to 8.5 per cent, and the Standing Lending Facility (SLF) rose by 50 basis points to 10 per cent and Standing Deposit Facility was also hiked by 50 basis points to 7 per cent.
A senior official in the BB said to tackle inflation the move of increasing policy rates are already working and the further hike will also check inflation pressure in the economy.
