Monetary Policy

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FE Team | Published: February 13, 2018 20:45:20

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RECENTLY, the Bangladesh Bank (BB) has announced a contractionary monetary policy for January-June period. Monetary policy is nothing but a mechanism to control the money supply in the market through using some financial instruments in a systematic way. The policy is treated as contractionary when it intends to pull money out of the economy to restrain the flow of money circulation in a bid to prevent inflation.
Inflation goes up when the economy is booming. On the other hand, production slows down in the economy when investment is not pouring in the businesses during the contractionary monetary policy regime. Inflation jacks up prices of all commodities which can negatively impact consumer spending power. This price fluctuation can make consumers nervous and erratic which can be reflected in their spending power and patterns.
The worst side of the contractionary policy is that it triggers unemployment. Increased unemployment results from the slowdown of production and high interest rates. As companies tend to refrain from expanding their business operations, they hire fewer employees during the contractionary monetary policy regime. Entrepreneurs also feel discouraged in investing more money, mainly because of less-availability of funds. They prefer to go for taking the benefit of high deposit rates by keeping their money in banks.
This year is the national election year and one of the election commitments of the incumbent government was to create sufficient employment so that one from every household would get a job. But owing to the contractionary monetary policy, investment and production will be badly hit which ultimately will affect employment. The small investors of the SME sector would become the worst sufferers.
The Advance Deposit Ratio has also been reduced in line with the monetary policy. It is well-known to all that some big borrowers have the tendency of not repaying bank's money in time so they would not be that much affected as they have the influence to get access to money whenever they want. But the small investors will have to face serious investment crisis so the authorities should devise means and ways to provide them proper support.
Md. Zillur Rahaman
IBBL, Lalmohan, Bhola.