Lifting lending rate cap won't ease inflation
Although the Bangladesh Bank has removed the interest rate cap to reduce inflation, the move is still not market-driven as the rate's formula remains under the central bank's control.
The Treasury bill rate and the 3% corridor is still set by the central bank. The bank should have left all these rates up to the market.
The new monetary policy has created corridors for liquidity management but the cap on the money flowing into the economy from banks will not play an effective role to reduce inflation.
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One of the central bank's policies to reduce inflation was to remove the lending rate cap and set the smart short-term moving average rate of treasury bills with a 3% margin for banks.
With this, the rate remains at the same as the previous level.
The Treasury bill rate currently hovers around 7%. Borrowers who had an interest rate of 9% now have to pay 10%.
However, in the case of CMSMEs and consumer loans, it has been increased by another 1% to 11%. Although interest rates on consumer loans are currently capped at 12%, further reductions in interest rates on these loans are likely to increase inflation.
The monetary policy mentions that the growth of consumer loans has been 22%. Even if the rate falls by another 1% now, the flow of credit will increase, leading to further inflation.
The central bank says it has contractionary monetary policy. Now, if it does not step in where the contraction is needed, it won't play an effective role.
The government borrows from the banking sector to meet the budget deficit. If this loan is taken from the central bank, then the pressure on inflation will increase.
However, it is not clear from where the central bank will provide loans to the government.
The central bank has said that they have purchased Treasury bills due to the liquidity pressure of the banks in the outgoing financial year.
However, it did not clarify what will happen in the new financial year.
If the central bank provides loan support to the government again, then inflation will increase.
Zahid Hussain, former lead economist, World Bank's Dhaka office.
Disclaimer: The content was prepared by TBS correspondent based on an instant reaction over the phone following the announcement of the new monetary policy for the first half of fiscal 2023-24.
