Repo rate has been reduced to 5.75 percent and cash reserve ratio (CRR) to 5 percent a year to help banks face any unexpected cash crisis in the near future
The Bangladesh Bank has made money cheaper and more cash available for banks in the wake of the withdrawal pressure amid growing concern of coronavirus that may lockdown the capital city for the time being.
In a circular issued on Monday, the central bank reduced repo rate by 25 basis points to 5.75 percent and cash reserve ratio (CRR) by 50 basis points to 5 percent a year.
The new repo rate is effective from today while that of CRR will come into force from April 1.
The decision came at the central bank's monetary survey meeting with Governor Fazle Kabir in the chair.
Both repo rate and CRR have been slashed to increase availability of cash in the banking system, said Dr Md Habibur Rahman, executive director of Bangladesh Bank.
Repo rate, also known as policy rate, is the central bank's lending rate for commercial banks.
Currently, repo rate is 6 percent and average inflation in February stood at 5.60 percent.
On the other hand, the reduction of CRR, the amount banks have to keep with central bank as reserves, will save cash money for banks to invest.
Banks now have to set aside 5.5 percent of clients' deposits as CRR.
Two years back on April 4, 2018, the central bank cut CRR by one percentage points to 5.5 percent helping the banking system to have an additional Tk20,000 crore in hand.
Currently, the banking sector is sitting with excess liquidity of more than Tk1 lakh crore, invested mostly in government bills and bonds.
The central bank's move came amid mounting pressure from various quarters for reducing policy rate as a precautionary measure to tackle any unexpected cash crisis in the near future.
On Saturday, the Centre for Policy Dialogue (CPD) recommended that the government should inject additional money – either by lowering policy rate or buying treasury bills – into the economy to fight the challenges arising from the coronavirus outbreak.
"We did not face unusual pressure of cash withdrawal yet," said Trust Bank Managing Director Faruk Moinuddin.
He said banks have enough liquidity as loan demand is very low amid stagnation in business expansion over corona fear.
The reduction of CRR is precautionary measure which will keep the money flow normal, he added.
In response to corona outbreak, Bangladesh Bank has been taking a series of measures to help banks and businesses during the tough time.
On Sunday, the central bank said it will provide cash support to banks through buying back government securities, if necessary.
If any bank has excess investment in government securities, it can sell those to the central bank to collect cash, said the circular.
Last week, the Bangladesh Bank came up with a bundle of packages, including a six-month moratorium on loan repayments to June, in a bid to protect the economy from the shock of the coronavirus fallout.
In another circular, the central bank relaxed foreign exchange regulations for trade transactions and extended the facilities as well to help businesses offset the impacts of the pandemic.