Central bank to unveil contractionary money policy 18 June

The central bank is once again going to announce a contractionary monetary policy for the first half of the upcoming fiscal year with the aim of tightening money supply in order to rein in runaway inflation.

In a letter sent to media outlets, the central bank said the monetary policy will be unveiled at a programme at its headquarters in the capital on Sunday afternoon.

With the governor of the bank presiding, deputy governors, the head of the Bangladesh Financial Intelligence Unit (BFIU), the chief economist, and other officials of the Bangladesh Bank will be present on the occasion. 

According to officials, the new monetary policy will introduce changes in various areas. One significant change involves lifting the existing loan interest rate cap, which is expected to lead to an increase in bank loan interest rate as well. At present, the maximum lending rate of banks is capped at 9%.  

According to the new policy, the new lending rate system is referred to as "SMART" – Short-Term Moving Average Rate. The six-month average interest rate on 182-day Treasury bills will be treated as the base rate. There will be a corridor rate along with it. This corridor may be around 3%. Banks can determine the lending rate by adding or subtracting the corridor rate from the Treasury bill rate.

Currently, the interest rate on 182-day Treasury bills is a little over 7%. This means the interest rate on consumer loans will be as high as 10%. Loans that are currently carrying 9% interest will also bear interest as per the new rate.

A central bank official said the corridor could be slightly lower than 3%. In that case, it will be possible to keep the lending rate in single digits.

In line with the government, the new monetary policy is also likely to set its inflation target at 6%. 

In the proposed budget for the fiscal 2023-24, the government has set a target to bring down inflation to 6%, although inflation in May 2023 stood at 9.94%, the highest in a decade. It was 9.24% the previous month. 

The policy rates may also be increased. The hike in key interest rates, also known as repurchase agreement (repo) and reverse repo rates, will make money costlier, thereby discouraging banks from lending.

The repo rate is the rate at which banks borrow funds from the Bangladesh Bank, while the reverse repo rate is the rate at which banks deposit their excess funds with the central bank.

According to data from the central bank, the repo rate was raised by 25 basis points to 6% in the last monetary policy for the second half of FY23.

In addition, it is likely that the monetary policy will include the calculation of net reserves and the implementation of a market-based single foreign exchange rate, bank officials added. 

Md Habibur Rahman, chief economist at the central bank, told The Business Standard that a uniform exchange rate will be announced in the new monetary policy and then the central bank will no longer have a dollar selling rate. 

"The central bank will sell dollars from its reserves at a uniform rate determined by the market. In that case, the interbank exchange rate may be considered the base rate. However, no decision has been finalised in this regard yet," he added. 

According to data from the central bank, the last interbank dollar price was Tk108.50 on 12 June. Currently, there are at least five rates of the dollar in force in the market. These are the interbank rate, export proceeds, remittances, central bank dollar selling rate, and cash dollar rate.

The IMF made the single exchange rate conditional on approving its $4.7 billion loan to Bangladesh.