Regulatory policy rate cut is feared to fuel inflation further as economists say other economic indicators are not showing supportive signs.
After months of cries from business circles for easing the policy rate, the central bank finally lowered the policy rate by 50 basis points to 9.50 per cent to spur private investment in the country passing through prolonged economic sluggishness.
But the key policy decision of the Bangladesh Bank (BB) raised too many questions from various quarters over its rationality as the US$500-billion economy is still passing through a spell of higher inflation while the pressure of "imported inflation" seems to be expanding due to worsening crisis in the Middle East.
Apart from that, other indicators like growth of reserve money (RM) or high-powered money keeps ballooning alarmingly. On the other hand, the ongoing energy crisis in the industrial hubs is turning severe and it ultimately emerges as the prime constrain to industrial production.
The central bank in its latest half-yearly monetary policy statement (MPS), unveiled a month ago, kept the tight monetary policy unchanged considering higher inflationary pressure but introduced a Tk 600-billion stimulus package to revive the economy through reopening the shut industrial units.
Simultaneously, they also directed banks to keep the weighted average spread between deposit and lending rates within 4.0 per cent in a move aimed at reducing borrowing costs and boosting industrial growth.
Despite such benefits, enough interest of private-sector players in borrowing formal credits has not been seen yet. Under such circumstances, money-market analysts think the policy-rate-cut decision may enhance more risks than benefits.
Seeking anonymity, a BB official has said the monetary policy committee extensively reviewed domestic and global inflation trends alongside investment, private-sector credit growth, employment, economic growth and the country's external balance before reaching the decision.
He said the inflation rate dropped by 26 basis points to 9.16 per cent in June last compared with the May count of 9.42 per cent. "We're hopeful that the downward trend in inflation may continue in the coming months too."
Reserve money is through which the central bank injects money into the market and is considered one of the major inflation-fuelling indicators. The growth of such money is dubbed astonishing.
According to BB data, the growth of the reserve money was recorded 0.12-percent negative in June last year. Afterwards, it started leaping to 2.52 per cent, 3.47 per cent, 9.23 per cent, 13.35 per cent, 14.39 per cent and 21.74 per cent in July, September, December, February, April and May last respectively.
Reserve money is the total amount of currency in circulation plus commercial banks' deposits held with the central bank, acting as the foundation for the entire monetary system.
It is also called "high-powered money" because it forms the foundation for the expansion of bank deposits through the money-creation process.
Former lead economist in the World Bank's Dhaka office Dr Zahid Hussain says the central bank should have done the risk-benefit analysis before reaching such a critical decision under the current macroeconomic circumstances.
"It'll undoubtedly enhance inflationary risk in the coming days," he told The Financial Express.
With the easing monetary stance, the noted economist said, the banks will be able to borrow low-cost funds from the regulator and it may lead to unproductive and risky avenues like in the past.
"This may trigger financial-sector risks. So, there are many risks but I do not see promising signs of benefits because no positive change in constraints hampering private investment, particularly global uncertainty and energy crisis," he said.
Dr Hussain also notes that the central bank in its latest monetary-policy statement (MPS) programme stated that they would keep the tight monetary policy unchanged unless the inflation rate comes down to a tolerable level. "But, within a month, the regulator took a reverse decision. It certainly undermines the credibility of the policy statement."
He also alerts that the worsening situation in the Middle East indicates that the pressure of "imported inflation" may increase further in the coming days.
"I don't know why they are adding fuel to the fire now," he wonders.
Director-General of Bangladesh Institute of Bank Management (BIBM) Dr Md Ezazul Islam has said the BB seems to adopt a growth-supportive policy in aligning with the government's political manifesto for reviving the economy after a prolonged sluggishness.
"There will be temporary inflationary pressure on the economy," he added.
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