Latest policy rate hike and its implications

FE Team | Published: November 28, 2023 20:01:00

The containment of the ongoing high inflation which has been hurting the poor and low-income people most is obviously the number one priority before any well-meaning government. Notably, within the span of just one month between September and October this year, inflation rate registered an increment of 0.3 percentage point, or in other words, by more than 3.0 per cent (from 9.63 per cent to 9.93 per cent). Against this backdrop, the central bank has taken recourse to the widely tested and practised tool – the key policy or Repo rate – to rein in inflation by jacking it up. The objective is to make funds costlier. The Bangladesh Bank (BB) has gone for this obvious choice for the seventh time since May last year. The repo rate, which is the rate at which the central bank lends money to commercial banks or different other financial institutions, has been upped by 50 basis points (bps) to 7.75 per cent, that came into effect from Monday (November 27).
And this is nothing out of the ordinary since the US Federal Reserve, too, has done it (raising of policy rate) 11 times since March last year, while neighbouring India in May last did it by 250 bps at one sitting. But to the question, if the policy rate hikes so effected so far will have or already had any impact on the current inflation rate such as on the stubbornly rising consumer prices, the answer, going by some central bank officials, is that it usually takes a few months before the impact, if any, is felt. In that case, it can be expected that the latest policy rate rise should bear fruit by January and February next year. In this regard, the BB's new Monetary Policy Committee (MPC), which in its inaugural meeting took the decision of hiking the policy rate, is said to have done so with a view to reducing the inflation rate to 8.0 per cent in December this year and to 6.0 per cent by June next year. So, the general public already reeling from the pressure of ever-rising cost of living will have to have their fingers crossed till that time.
Seeing that similar measures adopted by advanced economies in the West including the USA indeed proved effective, the BB's action to that end is without a doubt commendable. That being so some economists are of the view that the public could reap the benefit of the measure (policy rate raise) had it been applied at an earlier stage when inflation evinced a rising trend.
Also, the policy rate hike by the BB so effected will see the reference lending rate (the interest margin with the so-called SMART or six-month moving average rate of treasury bills) going up by 25 bps to 3.75 per cent, meaning banks' lending rate will rise to 11.8 per cent. Evidently, with costlier credit private sector growth will shrink, unemployment rate will rise, while banks will experience growth in deposit. Since checking inflation is the central bank's main goal to achieve through policy rate hike, all actors of the economy including businesses will be required to bear with the discomforts that would go with it for some time. The lending rate hike, at least in theory, would be in the greater interest of the economy.