A quick look at monetary policy

When inflation becomes unbearable or overall price situation becomes unstable, it is the central bank that has to face the biggest challenge to contain the inflation or retain the price stability in the developed countries. Though many developing countries have also placed the responsibility of maintaining price stability on the respective central banks, there are many limitations in this regard. The central banks in many of these countries struggle hard to do the tough task to contain inflation using the monetary instruments. They also have to unveil the monetary policy statement (MPS) time to time so that people can know what the central banks are going to do in the upcoming days to curb the persistent rise of price level.
In Bangladesh, it was 18 years ago that the country's central bank first unveiled the MPS to public and entered into the age of transparent credit policy. Monetary policy is also labelled as credit policy as directing the overall public and private sector credit through various policy rates to keep the money supply at the desired level is the key task of the policy. By adjusting the overall money supply, the central bank tries to tweak the price level as well as inflation.
Adjusting the supply of money through buying or selling securities in the open market is a conventional method used by the central bank. According to International Monetary Fund (IMF); "Open market operations affect short-term interest rates, which in turn influence longer-term rates and economic activity. When central banks lower interest rates, monetary policy is easing. When they raise interest rates, monetary policy is tightening." The MPS provides a clear indication about whether the central bank is going to tighten or ease the money supply.
Since January 2006, Bangladesh Bank has been releasing half-yearly MPS until January 2019. In the next five years, the MPS was issued annually undermining the public communication of the central bank in regards to its most critical job. The half-yearly publication of the MPS, however, had resumed in January last year when the incumbent governor announced his first credit policy.
On Thursday last, the MPS for the first half of the current fiscal year (FY25) was disclosed by the central bank. Discontinuing the tradition of unveiling the credit policy in press conference, it was posted on Bangladesh Bank's website. The reason behind doing so is a series of boycotts of the central bank events by the main forum of the economic journalists protesting the restriction on movement of the reporters inside the headquarters of Bangladesh Bank. The relation between the media and the central bank turned into a bitter one when economic reporters publicly boycotted the governor at the post-budget press conference in presence of the finance minister. For the last few months, economic journalists, led by Economic Reporters' Forum (ERF), have been demanding withdrawal of the restriction on free movement of media people inside Bangladesh Bank for the sake of greater transparency and independent journalism.
By not arranging the press conference and inviting the media to attend to the MPS announcement event, the authorities of Bangladesh Bank has made another wrong move. No matter whether journalists boycott or avoid the press event, the central bank should arrange it to uphold its communication policy.
Before going to examine the latest credit policy, it is important to know the outcome of the earlier MPS or the extent of success and failure of it. A good thing is Bangladesh Bank in the last week published the Monetary Policy Review (MPR) 2023-24. It is described as 'an all-encompassing analysis of the prevailing macroeconomic, monetary, and financial sector circumstances.' The primary objective of the review, as stated by the governor in his message, is to 'proactively identify potential near- and medium- term challenges within the existing monetary policy stance.' Moreover, as he expected, the MPR is likely to 'serve as a valuable resource for policymakers in shaping future monetary policy strategies by examining the impacts of prior measures.'
It is to be noted that the first monetary policy review report was prepared and published by the Policy Analysis Unit (PAU) of the central bank in cooperation with World Bank Institute (WBI) in October, 2005. The review document was quite extensive and set an example for future. In later years, the review has been published almost regularly with a few infrequent intervals till 2014. Later it was discontinued and the publication resumed after six years in 2020 on yearly basis.
The latest review report indirectly acknowledged that the central bank's effort to contain inflationary pressure in the last fiscal year did not bring an optimal outcome. "In the face of persistently high inflation, BB has implemented a series of monetary policy measures to control inflation and maintain a stable economic environment. The monetary policy stance in H1FY24 and H2FY24 was tight on upholding a hawkish approach to contain growing inflationary pressures," said the review report. "Maintaining a tight monetary policy stance throughout the latter half of FY24 seems prudent to manage inflation and stabilize inflation expectations while ensuring sufficient funding to support growth in the productive sectors of the economy," it claimed. The annual average inflation rate, however, stood at 9.73 per cent at the end of FY24 against the revised target of 7.50 per cent.
The report, thus mentioned that the 'ongoing high inflation may require additional monetary tightening for an extended period.' Does the latest MPS indicate so? In fact, the latest MPS said: "For the first half of FY25, BB will maintain a cautiously tight monetary policy stance, keeping the policy (Repo) rate at 8.50 percent, the SDF rate at 7.0 percent, and the SLF rate at 10.0 percent unchanged." Will the measures able to bring the optimal result? This column will try to find the answer in the next week.

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