Rate-regulating SMART regime is destined to go as the central bank is set to make major decisions on Bangladesh's monetary front, possibly allowing market-driven interest rates.
Alongside the ditching of SMART, there are some other key issues like pre-market-based exchange- rate mechanism and monetary-tightening steps that could come in the upcoming monetary policy committee (MPC) meeting set for today (Wednesday) at the Bangladesh Bank headquarters.
Earlier at a recent public discussion, BB governor Abdur Rouf Talukder made a hint clearly that the central bank now considers moving towards a fully market-based interest rate from the existing reference or SMART rate, in the midst of reappraisal of execution of IMF lending terms that press for such deregulation.
"There will be no more restriction on the interest rate and banks will enjoy the liberty to fix interest rate based on demand and supply," he was sharing the current plan of the BB.
Regarding another major reform issue, exchange rate, the governor also informed the audience that they had been working to introduce crawling peg, which will also be an interim arrangement before going for completely market-dominated exchange-rate system.
Sources at the BB say the issues are likely to top the agenda in the MPC meeting as the visiting IMF representatives, assessing progresses on their recommendations before approving the third tranche of a $4.7-billion lending package to restore Bangladesh's tightened macroeconomic stability, are not enthusiastic about the current state of lending-rate arithmetic and exchange-rate volatility.
"So, it is expected that the central bank might go for discarding the SMART regime, which came into effect on the money market from the beginning of the ongoing fiscal year (FY'24), at the MPC meeting," said one source.
Simultaneously, it is also learnt that the BB would possibly go for sharing nature of the crawling peg and the launching deadline of the mechanism to temporarily reduce the volatility on the foreign-exchange front.
Under the new pegging matrix, according to the sources, there will be a narrow band corridor where REER (real effective exchange rate) stands in the middle. The corridor will have an upper ceiling and floor rate and the exchange rate will move within the bounds.
According to the sources, the IMF-team members were not happy about the inflation-containing steps as the rising costs of the commodities continue hurting the consumers in Bangladesh.
To contain the higher inflationary regime, the BB could go for further tightening monetary steps squeezing money supply to the market by revisiting the policy rate, according to the source.
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