Bangladesh Bank would continue with its existing contractionary monetary policy stance (MPS) for an extended period to contain inflation that has already surpassed the annual target, hitting hard the lower-and middle-income brackets of people.
Its latest Monetary Policy Review 2022-23 dropped the hint, observing that the stubbornly-high inflation in the economy raises concerns about 'unanchored inflation expectations'.
"…for this reason, it may necessitate an extended period of the contractionary policy," reads the publication.
Unanchored or de-anchoring inflation expectation means the short-term price shocks could change the long-term expectations.
"A shift towards an interest rate-focused monetary policy framework could enhance the effectiveness of the BB's monetary policy," the publication observed, ahead of the central bank's forthcoming monetary policy stance (MPS) for the July-December period (H1) of the next fiscal year (FY 2023-24).
The Monetary Policy Review offers a comprehensive overview of the current macroeconomic and financial sector landscape, encompassing both domestic and global economies.
It highlights the immediate and medium-term macroeconomic challenges while evaluating the effectiveness of the monetary policy concerning the objectives set by the central bank.
According to the review, the BB needs to proactively exercise caution and vigilance to anchor inflation expectations and limit the second-round effects of inflation.
The sharp depreciation of the exchange rate and high production and transportation costs kept domestic inflation elevated amid improvements in the supply situation and declining global commodity prices, it noted.
It observed that the headline CPI inflation (point-to-point) reached an 11-year high of 9.52 per cent in August 2022, rising from 7.56 per cent in June 2022, and remained above the 8.0-per cent mark before reaching 9.24 per cent in April 2023. It surged further to 9.94 (point-to-point) in May 2023.
The 12-month average inflation steadily increased to 8.64 per cent in April 2023 from 6.15 per cent in June 2022, significantly exceeding the target of 7.50 per cent for FY '23.
"Despite the central bank's policy tightening, improving supply situations, and declining global food and energy prices, the global inflation decreased slower than expected," it notes, adding that many advanced economies extended and intensified their policy-tightening efforts to bring inflation back to desired levels.
However, the growth of broad money (M2) decelerated from 9.43 per cent in June 2022 to 9.13 per cent in March 2023 due to a sharp decrease in net foreign assets (NFA) caused by a significant deficit in the balance of payments.
Contrary to it, according to the review, the net domestic assets (NDA) increased from 14.02 per cent in June 2022 to 15.40 per cent in March 2023, primarily driven by a surge in public sector credit growth resulting from weak revenue growth and lower borrowing from the national saving certificates.
However, credit growth to the private sector moderated to 12.03 per cent in March 2023 from 13.66 per cent in June 2022 mainly due to a slowdown in trade-related credits and weak investment demand.
It said that amid the BB's increased net selling in the foreign exchange market, a sudden rise in cash withdrawals from banks by depositors, and a sluggish deposit growth, the banking system experienced liquidity stress, leading to an upward trend in interest rates in the money market during this period.
The economy's future trajectory will depend on improving the country's balance of payments position while the current account deficit has significantly reduced, sustained improvement in the current account balance will require increased exports and remittance inflows.
The BB has adopted a 'cautiously accommodative' approach, establishing targets of 11.5 per cent growth for broad money (M2) and 14.1 per cent growth for private sector credit by June 2023.
This was accompanied by the increase in the repo rate - first by 25 basis points to 5.75 per cent in October 2022 and later to 6.00 per cent in January 2023.
The reverse repo rate was also raised to 4.25 per cent in January 2023.
jasimharoon@yahoo.com
