BB raises interest rates on govt bonds to rein in inflation

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Siddique Islam
The central bank has increased interest rates on government securities, particularly bonds, to curb inflation through attracting commercial banks and financial institutions to invest more in the securities.
"We've increased the interest rates on bonds to accept more bids in the auctions for withdrawing excess liquidity from the banking system," a senior official of the Bangladesh Bank (BB) told the FE Saturday without elaborating.
Excess liquidity of the country's scheduled banks stood at Tk 335.03 billion in December last year against Tk 347.62 billion in June 2009, according to the central bank statistics.
He also said the central bank has stepped up its efforts along with resuming the auction of 30-Day Bangladesh Bank Bills recently to mop up the excess liquidity from the market.
On March 8 last, the central bank resumed the auction of 30-day Bangladesh Bank Bills after nearly two months of suspension, the BB official said.
Although the latest moves do not mean that the central bank is making any radical shift in its accommodative monetary policy, it has made its intention clear that it wants to ease inflationary pressures on the economy, he added.
The country's consumers' price index (CPI) inflation rose to 9.06 per cent in February 2010, up from 8.99 per cent of the previous month, according to the Bangladesh Bureau of Statistics (BBS) data.
The rate of inflation went up by 0.07 percentage point in February, over that of the previous month, mainly because of the increase in prices of food items.
Meanwhile BB officials said the central bank is now monitoring the overall inflationary pressure on the economy from day to day to contain its rapid rise in the coming months.
They also said the existing upward trend of inflation might continue in the third quarter but it would, particularly in food inflationary pressure, decline in the fourth quarter of the current fiscal due to arrival of new 'Boro' crop coupled with the government's market intervention.
"But until then, we may continue our policy interventions," another BB official said.
The weighted average yield, generally known as interest rate on 5-year Bangladesh Government Treasury Bills (BGTB) rose to 7.8537 per cent in April from 7.8455 per cent of the previous month while 10-year BGTB increased to 8.7700 per cent from 8.7632 per cent.
On the other hand, the weighted average yield on 15-year BGTB stood at 8.7692 per cent this month (April) from 8.7488 per cent last month (March) while 20-year BGTB increased to 9.1500 per cent from 9.1100 per cent, the BB data showed.
Currently, three treasury bills and four bonds are being transacted through auctions to adjust the government borrowing from the banking system.
The T-bills have 91-day, 182-day and 364-day maturity periods.
On the other hand, four government bonds (5-year, 10-year, 15-year and 20-year) are being traded on the market.
Market operators expect that the call money rate, which is hovering between 3.00 per cent and 4.00 per cent, may move slightly upward following the measures taken by the central bank.
The BB officials, however, said the central bank is monitoring the overall money market situation closely to keep the market stable.