Liquidity Surges as Private Credit Stalls, Posing Policy Dilemma For BB

Bangladesh’s money supply is expanding at its fastest pace in years, but the private sector is borrowing at one of the weakest rates in decades-creating a delicate balancing act for the Bangladesh Bank (BB) as it tries to revive economic activity without reigniting inflation.

Latest central bank data show that reserve money, or high-powered money, grew by 17.86 per cent year-on-year in August, sharply up from 15.25 per cent in June, 13.35 per cent in February and only 2.52 per cent in July last year. The turnaround is even more striking given that reserve money growth was negative 0.12 per cent in June 2025.

Yet the surge in liquidity has failed to translate into stronger business borrowing. Private-sector credit grew by only 4.62 per cent in July, remaining near historic lows despite a significant increase in money circulating in the financial system.

The mismatch highlights a growing paradox in the economy: banks are awash with funds, but businesses are reluctant to borrow.

“The real constraints are weak credit demand, high lending risks and uneven distribution of liquidity among banks,” said Mashrur Arefin, Managing Director and CEO of City Bank.

He noted that deposits have been growing much faster than loans at a time when excess liquidity in the banking sector stood at around Tk4.08 lakh crore by June.

“Excess liquidity and lendable liquidity are not the same,” Arefin said.

According to him, banks are becoming increasingly cautious because of rising default risks, while businesses are holding back investment plans amid high borrowing costs, energy shortages, weak market demand and lingering policy uncertainty.

As a result, a significant portion of available funds is flowing into government securities rather than private-sector loans.

The latest monetary indicators reflect this trend. While reserve money rose by 17.86 per cent in August, broad money expanded by 12.40 per cent and bank deposits by 11.96 per cent. In contrast, private-sector credit remained subdued at 4.62 per cent.

At the same time, public-sector credit expanded by more than 32 per cent, with net government borrowing from the banking system increasing by over 36 per cent.

Economists say this suggests that the benefits of liquidity expansion are not spreading evenly across the economy, with the public sector absorbing a larger share of bank resources while private investment remains sluggish.

To stimulate economic activity, Bangladesh Bank reduced its policy rate by 50 basis points to 9.50 per cent in August, after keeping it at 10 per cent since October 2024.

The move quickly affected financial markets. Treasury bill yields declined sharply, while overnight money-market rates softened. On Monday, the overnight Domestic Money Market Rate (DOMMR) stood at around 8.70 per cent, below the policy rate.

But cheaper money has yet to trigger a meaningful recovery in private borrowing.

A senior Bangladesh Bank official, speaking on condition of anonymity, said the rapid growth of reserve money remained a concern because of its potential impact on inflation.

“Certainly, it is a concern for all of us because it fuels inflation to some extent,” the official said, pointing to quasi-fiscal lending programmes and government borrowing from the central bank as factors behind the liquidity expansion.

The concern comes at a time when inflation remains stubbornly high. Overall inflation eased only marginally to 8.26 per cent in August from 8.32 per cent in July, remaining well above the central bank’s comfort level.

Adding to liquidity pressures, Bangladesh Bank has purchased more than US$6 billion from the foreign-exchange market since July last year, according to Bangladesh Institute of Bank Management (BIBM) Director-General Md Ezazul Islam.

Such dollar purchases inject taka into the economy unless the central bank absorbs the excess liquidity through sterilisation measures, Ezazul said noting that inflationary risks remain contained for now because weak private credit demand is acting as a natural buffer.

However, he warned that the situation could change rapidly if business confidence improves and firms begin borrowing more aggressively.

Once companies start using the existing liquidity for investment, imports, production and consumption, inflationary pressures could intensify if reserve money continues to expand at the current pace.

This leaves Bangladesh Bank confronting a difficult policy challenge: how to stimulate private investment in a sluggish economy while ensuring that excess liquidity does not trigger a fresh wave of inflation.

The central bank has projected private-sector credit growth of 6.8 per cent by December 2026 and 8 per cent by June 2027, but achieving those targets without undermining price stability may prove to be one of its toughest tests yet.