Banks bank on money multiplier

Money multiplier in Bangladesh hit a new high that indicates the taka generated more money than before, saving fund injection into banking system from the central bank.
A latest report of the Finance Division shows as of the end of September 2023, the money multiplier - defined as M2 money-supply balance divided by the base money supply or reserve money - stood at a record-high level of 5.45, as compared to 5.07 at the end of June.
Every one taka or BDT of central bank's money in Bangladesh was able to generate around 5.45 taka worth of money supply in the economy.
A higher value for this ratio, called money multiplier, indicates that the banking system generates higher money supply out of the money given by the central bank.
The money multiplier is important in macroeconomics because it determines the amount of money in circulation, which affects interest rates. It's also important in banking because it impacts monetary policy and the stability of the banking sector.
Growth in the money multiplier was expected to rise further in the second quarter of the fiscal year as banks have been utilising their existing money in the economy.
"Money multiplier rose to 5.45 at the end of September 2023 from 4.92 at the end of June 2023, resulting from a decrease in reserve-deposit ratio. However, the rise in currency-deposit ratio had offset the rise in multiplier to some extent," says Finance Division report.
"The pace of growth in the money multiplier is expected to increase as banks are not keeping money with the central bank," says a central banker.
He mentions that such multiplier usually remained higher in the advanced economies as there people do not hold money as people in Bangladesh do.
The banker, however, says the central bank calculates it to observe how much money is actually generated by one unit of money.
"We also measure it for future injection of money into the economy."
The CEO of a commercial bank told the FE that there is no relationship between tight money supply and money multiplier.
"Actually it depends on the reserve money. When the reserve money or money in circulation and banks' deposits with the central bank increase, it goes down and vice versa."

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