Funds get costlier as the regulator raises policy interest rate to a historic high of 9.5 per cent as exorbitant prices passing through many years now remain a concern for the interim government.
A 50-basis-point hike, announced Tuesday by the Bangladesh Bank with immediate effect, raises the rate from 9.0 per cent to 9.5 per cent-the highest since the introduction of such monetary-control instrument two decades back in 2003.
The central bank's decision comes in response to stubborn inflation, persisting above 10 per cent on a point-to-point basis, which hits hard lower-income population.
In a notification, dated September 24, the BB announced the belt-tightening action. The move follows a hint from BB Governor Dr Ahsan H. Mansur, who had signalled a further rate hike just the day before at a press briefing.
This marks the second increase under his leadership since taking office on August 20, following the August-5th changeover in state power in a student-mass uprising. Prior to his appointment, the policy rate stood at 8.5 per cent.
The latest hiker also aligns with advice from the International Monetary Fund (IMF), as Bangladesh's inflation rate remains a pain in everyone's neck notwithstanding government interventions through fiscal measures.
To manage liquidity more effectively, the central bank also raised the upper limit of the policy interest corridor. The Standing Lending Facility (SLF) rate rises to 11 per cent, up from 10.5 per cent, while the Standing Deposit Facility (SDF) floor rate moves up to 8.0 per cent from 7.5 per cent.
According to Bangladesh Bureau of Statistics (BBS) data, consumer-price inflation surged to 11.66 per cent in July 2023.
Since May 2022, the BB has implemented contractionary monetary policies to curb elevated inflation.
The policy rate, or repo rate, represents the rate at which the central bank lends to commercial banks to address liquidity shortfalls. Increasing the repo rate discourages banks from borrowing, thereby reducing money supply and helping to control inflation.
Governor Mansur hinted that further rate hikes could be necessary, signalling ongoing challenges in balancing inflation control and economic growth.
Economists agree that this is a step in the right direction toward containing inexorable inflation.
However, they argue that relying solely on such policy instrument may not be sufficient to dent the inflation, as analysts say market players rule the roost in price fixing.
Dr Mustafa K. Mujeri, Executive Director of the Institute for Inclusive Finance and Development (InM), told the FE that maintaining stability in the exchange rate is also crucial.
"Without a stable exchange rate, this measure will have limited effect, as Bangladesh's market heavily depends on imported goods," he notes.
He further explains that if the exchange rate remains volatile, the commodity market will likely remain unstable as well.
The economist also emphasizes uninterrupted supply chains for essential goods. "If there are disruptions to the supply chains, prices will skyrocket," he warns.
He has stressed the need for a sound and vibrant banking system, noting that a poorly governed banking sector cannot respond effectively to changes in the policy rate.
The InM chief says both fiscal and monetary policies must complement each other to achieve optimal results in controlling inflation. "If the government borrows excessively from the banking system, inflation will rise."
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