MPS gets mixed bag as tightening faces efficiency question

Economists expressed mixed reactions over the latest Monetary Policy Statement (MPS) for the next six months up to December, 2024.

Former World Bank's Dhaka office lead economist Dr Zahid Hussain said the central bank thinks they have taken enough tightening measures to improve the macroeconomic condition though stabilising exchange rate, containing inflation and streamline the financing sector.

"It is unrealistic thinking," he said.

He said the BB needs to assess why the tightening monetary stance is not working in containing inflation. "What are the areas that dilute the tightening? We do not see any such indications in this monetary policy," the noted economist said.

Questioning the existing monetary stance of the banking regulator, the independent economist said central bank abolished SMART-driven interest rate arithmetic from early May last and allow market-based rate with enhancing the policy rate to 8.50 per cent.

On the other hand, he said, it keeps injecting special fund through refinancing schemes and unconditional cash supports to the commercial banks as per their requirements, which basically diluted the tightening.

"The main task of the central bank is to control prices and it should not do any anti-tightening steps until it achieved the goal," the economist said.

Regarding the forex market, he said, the BB adopted crawling peg mechanism, which is a transitional step before moving towards a complete market-based exchange rate, with setting the crawling peg mid-rate at Tk117 per US dollar.

"We expected the rate would be widened further but it does not happen. It is a business-as-usual type of monetary policy. Lot of talks but no action," he added.

Dr. Zaidi Sattar, chairman of the Policy Research Institute of Bangladesh, a privately-owned think tank, told the FE that under flexible exchange rate regime depreciation will occur when there is an excess demand for foreign exchanges.

"We expect the Bangladesh Bank to let the forex market work".

He noted that it was exchange rate depreciated of 30 per cent that triggered inflation rate due to pass-through effect.

"A negative pass-through could have been triggered by tariff reduction to compensate for excessive one-time deprecation. But we missed the chance in the FY 2025 budget", Dr. Sattar added.

Chairman of Policy Exchange Bangladesh Dr M Masrur Reaz hailed the MPS, stating that the central bank brought significant change on the context of monetary policy in two months ago.

"It will take time to get the transmission affect of the MPC (monetary policy committee) decisions. So, keeping the major indicators like policy rate unchanged a wisely decision," he said.

Regarding the private sector credit, he said as the cost of funds continues growing while productions and business expansion moves have badly been affected due to various internal and external factors.

Under the current context of the money market, he said the demand for credits by the private entrepreneurs seems to be on the downward trend.

Alongside inflation and forex, he said, the BB should have given clear directions how the banks would stop the growing NPL burden and recover the existing non-performing assets.