Bangladesh Bank raises lending rate of banks to 10.70%
Banks can now add 3.50% with the reference lending rate of 7.20%
The Bangladesh Bank has increased banks' lending rate by 50 basis points to 10.70% for October.
The central bank announced the new decision through a circular yesterday.
Confirming the matter at a press conference yesterday afternoon, the central bank's spokesperson Md Mezbaul Haque said banks can now add 3.50% with the 7.20% reference lending rate – also known as SMART rate.
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At present, banks can add 3% with the SMART rate, which is measured by the six months moving average rate of treasury bills.
For pre-shipment export, agriculture and rural loans, banks can add 2.5% with the SMART rate, which was 2% earlier.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said raising the interest rate is definitely a good decision. Now, it will be possible for banks to increase the interest rate of deposits. As a result, deposits in banks may rise, which will help increase banks' liquidity.
Applauding the central bank's decision, Zahid Hussain, a former lead economist of the World Bank Dhaka office, told The Business Standard, "I think the tendency of the increasing inflation rate may stop at some point due to this small rate increase. But inflation will not decrease."
The economist believes that the lending rate needs to be increased more to reduce inflation.
In the monetary policy for the July-December period, the Bangladesh Bank introduced SMART to fix the lending rate.
The policy says banks can add a maximum 3% and non-bank financial institutions (NBFIs) a maximum 5% with the SMART rate to fix the lending rate. In July, the SMART rate was 7.10%, however it has also increased by 10 basis points in two months.
The step of increasing lending rate will make the loans costlier, which may decrease the loan demand.
The private sector credit growth in Bangladesh slumped to 9.75% in August, the lowest in 22 months, as businesses and individuals reined in borrowing amid economic headwinds and uncertainty surrounding the upcoming national elections.
According to Bangladesh Bank data, the last time private sector credit growth dipped below this figure was in October 2021 registering a growth of 9.44%.
Loans to the private sector have been declining consistently since November last year when the growth was 13.97%. It came down to 9.82% in July this year, central bank data shows.
The Bangladesh Bank increased the policy rate by 75 basis points to 7.25% on Wednesday from 6.50%. The hike, the decade's highest in a single day, aims to make money costlier to curb inflation.
This is the second hike in three months and sixth since May last year when inflation just shot over 8% from below 6% in January 2022
