CRR for banks up to tame inflation

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FE Report
Bangladesh Bank raised Wednesday the cash reserve requirement (CRR) by 0.5 percentage points to 5.5 per cent for the commercial banks to curb inflationary pressure on the economy.
Under the new rules, the commercial banks will have to maintain 5.5 per cent CRR with the central bank from their total demand and time liabilities on a bi-weekly basis.
The new CRR will be effective from May 15, 2010, the central bank said in a circular, issued Wednesday.
The new CRR comes after a gap of more than four years. The central bank last increased the ratio by 0.5 percentage points to 5.0 per cent on October 1, 2005.
It, however, said the banks will be allowed to maintain the reserve at 5.0 per cent instead of the existing 4.50 per cent on daily basis, but the bi-weekly average has to be 5.50 per cent in the end.
"We've increased the CRR to curb inflationary pressure on the economy,"
General Manager of the Monetary Policy Department of Bangladesh Bank (BB) Begum Sultana Razia told the FE.
The central bank expects that the inflationary pressures might ease in the upcoming months following the latest policy intervention, she added without elaborating.
"We're hopeful about mopping up over Tk 15 billion excess liquidity from the money market by raising the CRR," another BB official said, adding that the amount of excess liquidity over CRR is now around Tk 31.14 billion.
He also said broad money supply in the market has already risen to 21.9 percent, far higher than the central bank target of 15.5 percent, as inflation soared on the back of rising commodity prices in the global market.
The central bank also increased the rate of statutory liquidity ratio (SLR) to 18.50 per cent from the existing 18 per cent, which will come into effect from May, 15 this year, the BB said in a separate directive, issued on the same day.
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 to ease inflationary pressures on the economy, the BB officials said.
The country's inflation as measured by consumers' price index (CPI) 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 points in February, over that of the previous month, mainly because of the increase in prices of food items.
Former central bank governor Salehuddin Ahmed termed the increase of CRR as justified, saying that it was needed to contain the ongoing upward trend of inflation.
"The central bank will have to monitor the impact following the increase in CRR closely," Dr. Ahmed told the FE, adding that the BB may readjust the rate of CRR further considering the country's overall economic situation.
The country's businessmen think the BB's latest move may affect them more or less, saying that the borrowing from banking system may be squeezed in the near future due to increase in the CRR.
"The credit flow to the private sector may fall slightly in the upcoming months following CRR increase," former president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) Mir Nasir Hossain told the FE.
Mir Nasir, also former chairman of the Eastern Bank Limited, said he could not understand why the BB raised the CRR at the moment when the country's overall investment has not reached a satisfactory level.
President of Dhaka Chamber of Commerce and Industry (DCCI) Abul Kasem Khan echoed Mir Nasir's sentiment saying the BB move would shrink the loan accessibility for businessmen.