Credits get costlier as policy rate raised to 9.0pc

Regulatory-policy rate is raised by 50 basis points to 9.0 per cent suiting interim government's move to contain inflation-fuelled price rises for a long time.

Bangladesh Bank (BB) announced the decision Sunday, which would make funds costlier for both businesses and consumers. But the move reflects the central bank's concern over sustained inflation that has been exacerbated by higher food-and non-food costs.

Inflation rate hovered around 12 per cent in July, the first month of the current fiscal year 2024-25.

"With inflationary pressures continuing to build, this overnight repo rate has been raised to 9.0 per cent," says a statement issued by the central bank on Sunday afternoon.

The Monetary Policy Committee, led by new Governor Dr Ahsan H Mansur, revised up the policy rate, or repo rate, during a meeting at the BB headquarters earlier in the day.

The new policy rate will come into effect from Tuesday (August 27, 2024) as the nation will observe a public holiday on Monday.

The Standing Liquidity Facility (SLF), the upper ceiling of the interest corridor, will now rise to 10.50 per cent from the current 10.0 per cent, while the Standing Deposit Facility (SDF), the floor rate of the corridor, will increase to 7.50 per cent from the existing 7.0 per cent.

The move is expected to tighten liquidity in the banking system, making borrowing from the central bank more expensive.

For consumers, the immediate impact will likely be felt in higher loan-interest rates. Businesses, particularly small and medium enterprises (SMEs), may face tighter credit conditions, potentially slowing their expansion plans.

Syed Mahbubur Rahman, managing director and CEO at Mutual Trust Bank (MTB), told the FE that this would help raise the deposit rate and lending rate also.

"But our net margin will be reduced."

Economists see this as a right direction as the Bangladesh Bank should continue with a tight monetary-policy stance if inflation does not show signs of easing in the coming months.

They think such enhancement will help tame the demand. But they say there many supply constraints that need to be improved for containing the inflation.

Dr Zahid Hussain, an independent economist, welcomes the rate hike, describing it as a necessary step to control the wayward inflation.

He emphasizes the importance of addressing supply-side constraints, especially in the light of recent floods and other disruptions.

"Improving the supply chains is crucial for complementing this monetary tightening," notes Dr Hussain, a former World Bank economist.

The rate hike is expected to tighten liquidity, making borrowing more expensive for both businesses and consumers.

Dr Hussain believes the move is essential to stabilise prices and prevent further inflationary spirals.

However, the economists also caution that more needs to be done to address the underlying supply issues exacerbated by recent natural disasters in Feni and its peripheral districts.

Dr Hussain emphasizes that the decision underscores Bangladesh Bank's firm stance against inflation that makes consumer goods pricier.

"This shows that the Bangladesh Bank will not compromise in its efforts to stabilize the economy," he says, noting that the central bank's commitment to controlling inflation is clear.

Dr M. Masrur Reaz, CEO and Chairman of Policy Exchange of Bangladesh, says while the rate hike is a necessary step, there is also a need to relax the restrictions on letters of credit (LC) for essential commodities. The import restrictions are on for long.

"Easing LC conditions for essential goods could help stabilise the market," he suggests, emphasizing that ensuring the smooth flow of critical imports is vital for controlling prices and supporting economic stability.

Dr Masrur points out that such measure could complement the central bank's monetary policy by addressing supply-side challenges.

He further emphasizes the role of the Ministry of Commerce in addressing inflation. The ministry has to engage directly with key stakeholders, including business leaders and industry representatives.

"The Ministry of Commerce needs to sit with key stakeholders so that the market can be stabilised," he says, adding that such discussions are crucial for identifying practical solutions to supply-chain disruptions and other market challenges.

[email protected], [email protected]