Funds for doing business get costlier as the central bank raised again the policy rate by 50 basis points along government line of aggressive action against high inflation and price rises.
In a span of less than two months of last raise comes the Bangladesh Bank (BB) step enhancing the policy or repo rate as per government bid to knock the inflation down to 8.0 per cent by December, as high prices hit consumers hard.
As part of the ongoing money-contractionary move to check inflation, the central bank enhanced the policy rate by 50 basis points over the existing 7.25 per cent, BB sources said.
With the latest revision, the whole structure of the IRC (interest rate corridor) also gets revised upward accordingly as the policy rate stands in the middle of the corridor.
The arithmetic change means, according to the BB sources, the standing lending facility (SLF), which is the upper ceiling of the IRC, gets enhanced by 50 basis points to 9.75 per cent while the floor of the corridor called standing deposit facility (SDF) revised to 5.75 per cent from the existing 5.25 per cent.
Not only the IRC, according to the decision, the margin of SMART rate through which the banks fix their maximum lending rate gets expanded by 25 basis points to 3.75 per cent instead of the existing 3.50 per cent.
The revised rate will be effective from today (Monday), sources at the BB said after the decision was made Sunday by the recast monetary policy committee (MPC).
In an impromptu post-decision briefing, BB chief economist Dr Md. Habibur Rahman, a key member of the MPC, said the central bank made the revision in the policy rate as part of its objective to further squeeze the money supply on the market to bring down the inflation within the targeted 8.0 per cent by December and 6.0 per cent by June next year.
"And we will be following tighter monetary measures until the inflation-related target is achieved," the BB chief economist said.
Not only the policy rate, Mr Rahman said, both upper ceiling and lower limit in the interest corridor will also be adjusted upward accordingly while the maximum margin from the SMART rate raised by 25 basis points.
"Banks are now fixing their lending rate by adding maximum 3.50 percentage points with the SMART rate. From tomorrow (November 27), the margin (that includes cost of funds and profit margin) will be 3.75 per cent," the chief economist told reporters.
The central bank's latest change in the policy rate comes as the rate of inflation got further inflated to 9.93 per cent in October 2023 from September count of 9.63 per cent.
Under the newly introduced interest-rate-calculation regime launched by Bangladesh Bank in July last, the lending rate is now being fixed based on the reference rate or SMART (six-month moving average rate of treasuries) rate. And the last auction of 182-day Treasury bill for the month of November, held Sunday, saw the cut-off yield rise to 10.50 per cent.
About the latest SMART rate, spokesperson for the central bank Md. Mezbaul Haque said the November SMART Rate, which will be applicable from coming December, increased to 7.72 per cent.
With inclusion of latest maximum SMART margin of 3.75 per cent, the maximum lending rate from December will be 11.47 per cent, 54-basis-point higher from November's 10.93 per cent, he said.
Managing Director and Chief Executive Officer of BRAC Bank Limited Selim R. F. Hussain hails the decision, saying that increasing rate to control inflation is a classic practice in macroeconomic management.
"This is the way countries like India and Sri Lanka successfully controlled inflation," he told the FE, adding that such move should have been taken much earlier.
This is in the right direction to curb inflation, says another banker, Syed Mahbubur Rahman, Managing Director and Chief Executive Officer of Mutual Trust Bank Limited (MTB).
He thinks it will certainly put pressure on the banks' NIM as the policy- rate adjustment will immediately push up the deposit rate while the lending rate cannot be increased immediately--and there's a lag effect of 6 months.
"We've to wait and see how the market responds in respect of inflation. We are going to see further tightening of liquidity of the market," the experienced banker said. Also, the forthcoming election will have further impact on liquidity.
Former lead economist of World Bank's Dhaka office Dr Zahid Hussain told the FE that this is done in order to contain the higher inflationary pressure on the economy.
"The enchantment of the policy rate helps reduce the credit growth and aggregate demand leading to fall in the rate of inflation. But this works slowly as it takes time to transmit," he said.
The economist notes that interest rates tend to move in the same direction as inflation. "This is primary tool used by central banks across the world to manage inflation."
Higher interest rates are generally a policy response to rising inflation, he mentions.
The central banks in the western economies also apply this weapon to tame recently raging inflation that now cooled down in most cases.
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