Businesses' worry over interest instability prompts the central bank to weigh playing the morality card to peg bank lending rate within 14 per cent, in an exigent paradigm shift.
Officials say the Bangladesh Bank (BB) is now considering applying 'moral suasion' on the commercial banks to keep the maximum lending rate within 14 per cent on the money market.
Moral suasion mechanism comes into play to prevent any possible act of unusual hike in the lending rate by banks taking the opportunity of the market-oriented interest regime, just pivoted to through the lift of limits.
Moral suasion is a type of influencing procedure which is applied by central banks to keep the pressure on commercial banks in order to abide by the monetary policies that are established. In fact, most of the moral suasion involves verbal gestures and signalling through central bank minutes.
Seeking anonymity, a BB official said they had started monitoring the trend of interest rate on the market closely. "If we find any unusual behaviour by any market player in this open-market regime, we will act applying moral-suasion instrument to keep the market stable."
The central banker defines moral suasion as a kind of verbal instrument that the central bankers in many countries use to influence market and public sentiment into believing that they are in control of the economy and ready to act if and when needed.
Replying to a question, the BB official said the central bank would apply other instruments, too, like squeezing credit supports and other regulatory measures if any bank does not comply with the verbal instructions.
Getting afraid of an abnormal rise in lending rate following BB's recent policy shift from managed interest rate to completely market-driven rate, a delegation of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), led by its president Mahbubul Alam, met the central bank governor, Abdur Rouf Talukder, last Thursday.
In the meeting, the governor assured them that loan-interest rates would not exceed 14 per cent.
The FBCCI president said the cost of fund continued rising in recent times, affecting the businesses as entrepreneurs undertake a project considering the current interest rate, exchange rate and many other factors. If these change frequently, businesses face consequences.
"Thus, we have requested the central bank not to change the policies repeatedly," said the president of the country's apex chamber.
Talking to The Financial Express, managing director and chief executive officer of Dhaka Bank Emranul Huq said the lending rate of the bank did not cross the target 14 per cent. "This is probably the reason behind not receiving any instruction from the central bank till today."
Welcoming the BB's moral-suasion move as right and timely one, the experienced banker said the banks need to act sensibly in this market-driven interest regime so that the market is not overexposed and underrated.
Taking the current macroeconomic and credit-demand situations into consideration, he said, the 14-percent lending rate is enough for the banks. "If any bank goes over the target, it would trigger unhealthy competition that we don't want to see."
But money-market analysts term such option 'very conflicting' with the central bank's recent policy switch from managed to completely market-driven rate reintroduced on May 8, 2024 after discarding a reference rate called SMART.
Former lead economist of World Bank's Dhaka office Dr Zahid Hussain says moral suasion conflicts with the BB's officially declared policy for market-centric interest regime.
Discarding SMART, he argues, the BB officially abandoned any form of ceiling in fixing interest rate. But within less than two weeks, amid pressure from the businesspeople, a message of 14-percent maximum lending rate sent to the market, which is "unfortunate".
"The BB should wait for a certain period of time to observe how the market behaved with the policy shift. I think it will certainly hamper the policy credibility of the central bank," says the former WB economist.
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