Call money rate soars to 12-year high at 9.60%

The average call money rate, the interest rate at which banks borrow from each other overnight, has surged to 9.60% – marking the highest point in the last 12 years due to recent policy rate hikes by the Bangladesh Bank.

Bangladesh Bank data show banks borrowed Tk3,251 crore from the call money market on Sunday. This demand pushed the weighted average rate to a staggering 9.60%, marking the highest since 2013.

Prior to this, 2012 saw an average call money rate of 12.82%.

Sector insiders cited several reasons for the interest rate hike. On the one hand, the economic slowdown is making it harder to collect loans from borrowers, and high inflation is eroding consumer confidence, causing deposits to dry up.

On the other hand, banks' funds also significantly increased due to the policy rate hikes.

However, banks are obligated to maintain the Cash Reserve Ratio (CRR) against deposits. To meet this requirement, they are forced to borrow at higher interest rates.

Banks lend overnight money to each other to fill the asset-liability mismatch or to meet sudden demand for funds. The market was introduced in the country in the early 1980s.

Why call money rate keeps rising

According to the Bangladesh Bank report, the average call money rate in June this year was 6.05%, increasing slightly to 6.42% in July.

The rate rose to 7.23% in October, a day after the central bank's key policy rate was hiked, and went up to 8.53% at the beginning of December.

In the current monetary policy, unveiled for the six months to July, the central bank raised the policy rate by 25 basis points to 8%. The Bangladesh Bank gradually adjusted the policy rate upward by 200 basis points from 6% in June 2023 to bring down high inflation.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard, "Our call money market rate is increasing. The policy rate has risen several times in the last two months. As a result, the cost of funds for banks has increased."

He also said the current lending rate of banks is around 12%. With loan rates increasing, deposit rates have also risen from 6% to 8/9% with many banks. Consequently, the cost of banks is increasing, leading to a rise in interest rates.

Officials in the credit divisions of several banks informed TBS that the production of many industrial establishments has decreased, resulting in reduced cash flow, making it challenging for them to repay bank loans.

They also noted that short-term loans are being converted into long-term ones as traders are unable to repay them. This has led to an increase in the banks' outstanding loans, while the collection of loans has decreased."

Rising call money rates cast a shadow over bank profits, squeezing their margins as the cost of borrowing spikes. Yet consumer lending rates remain tethered to central bank regulations, leaving banks unable to pass on these higher costs to borrowers.

Previous record high of call money rate

Bangladesh's call money market experienced a record-breaking high in December 2010. The average call money rate soared to a staggering 33.54% – more than triple the previous month's figure of 11.38%.

The sudden surge in rate occurred after the central bank tightened its grip on lending by simultaneously raising both the statutory liquidity ratio (SLR) and cash reserve requirement (CRR) to 19% in December 2010.

This volatile trend persisted until December 2012, with the rate hovering around 12.82%. Remarkably, from the following year onwards, the call money rate plunged below 7%.