Policy or repo rate is raised significantly in an aggressive move to knock the steep inflation down below 8.0 per cent by December, as high prices hit consumers hard.
As part of the initiative to check inflation in a more aggressive way, the central bank enhanced the policy rate by 75 basis points from the existing 6.50 per cent, BB sources said.
The revised rate is effective from today (Thursday), sources at the Bangladesh Bank (BB) said after the decision was taken Wednesday.
Spokesperson for the central bank Md. Mezbaul Haque said the decision on increasing the policy rate came from the meeting held at the BB headquarters on Wednesday evening.
He said the central bank had already taken various inflation-checking steps in recent times. Though the rate of inflation came down slightly to 9.63 per cent in September from August count of 9.92 per cent, the drop was not that much as has been expected.
On the other hand, he said, the country's leading economists in recent meetings with the government suggested targeting inflation-containing activities first as it has been affecting common people much.
"So, considering all the factors, the BB increased the policy rate by 75 basis points to 7.25 per cent. Our target is to bring down the inflation rate below 8.0 per cent by December next," says Mr Haque, also an executive director of the central bank.
The issue of growing inflation has come up in almost every discussion in recent times in the country as people are struggling to cope with the higher inflationary pressure although the annual target for inflation this FY'24 is 6.0 per cent.
And food inflation that hit hard the poor remained over 12 per cent even in September.
Seeking anonymity, another BB official said with the upward revision in the policy rate, the whole structure of IRC (interest rate corridor) has been revised upward accordingly as the policy rate stands in the middle of the corridor.
It means, the official said, the standing lending facility (SLF), which is the upper ceiling of the IRC, gets enhanced by 75 basis points to 9.25 per cent while the floor of the corridor called standing deposit facility (SDF) revised to 5.25 per cent from the existing 4.50 per cent.
"I think it is a huge jump that we did not see in recent years," the BB official adds.
Asked about the lending rate as the adjustment is expected to put more pressure on the banks' profitability under the existing SMART rate, the central banker said the lending rate is set to be increased in coming days as the rate of 182-day treasury bills through which the lending rate is being fixed will be increasing, too.
Earlier, the BB, as part of its inflation combat, stopped injecting 'high-powered money' into the economy through 'devolvement mechanism' and curtailed the ratio of liquidity support to the banks.
Talking to the FE, Managing Director and Chief Executive Officer of BRAC Bank Limited Selim R. F. Hussain hailed the decision, saying that increasing rate to control inflation is a classic practice on macroeconomic management.
"This is the way countries like India and Sri Lanka successfully controlled inflation," he says, for a ready instance.
Managing Director and Chief Executive Officer of Mutual Trust Bank Limited (MTB) Syed Mahbubur Rahman thinks it will certainly put pressure on the banks' profitability as the policy- rate adjustment will certainly push up the deposit rate while the lending rate cannot be increased in six months.
The very reason for increasing the repo rate is to tighten the liquidity of the market.
"So, the NIM (net interest margin) of banks in this critical period of time to be under pressure," the experienced banker says about the major monetary weapon for inflation control.
When contacted, executive director of Policy Research Initiative of Bangladesh (PRI) Dr Ahsan H. Mansur said the decision of making big jump in repo rate is a good and bold one in the context of this election year.
"Now what the central bank needs to do is to leave the lending rate on to the market. If it is not possible, the lending rate should be enhanced by at least 75 basis points. Otherwise, it will bring a disproportionate outcome," says the eminent economist of the country.
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