BB back on restrictive track
Sunday, 21 September 2008
The Bangladesh Bank-BB-- after a gap of about three years has gone for a rise in the rate of one of the key policy tools, the repurchase agreement-Repo. The increase, though marginal, only 0.25 per cent, does otherwise highlight a shift in the policy stand on the part of the central bank. And notably, this decision to up the interest rate on Repo has come only a day after the Asian Development Bank's advice to follow tight monetary policy with a view to taming the soaring inflation. The International Monetary Fund-IMF-which suggested the central bank on a number of occasions in the recent past to put in place a contractionary monetary policy has, obviously, welcomed the latest move as 'timely'.
But, as expected, the bankers are unhappy with the latest central bank action. For, a good number of banks, already facing liquidity shortfall, might face problems in offering fresh loans. Repo rate affects the lending operations of the commercial banks through its effects on the availability of fund for making credits. Bankers argue that the BB action would hurt industrial growth, squeezing credit to key sectors such as garments and textile, agriculture and capital machinery import. The Repo rate hike is likely to affect consumers' credit, home loan and loans to other unproductive schemes more than any other areas, notwithstanding the fact that these schemes do also make positive contributions to the economy. Talking to this daily, a research economist echoed the sentiment of the bankers saying that the BB had tried monetary instruments to tame inflation three years back but without any outcome.
There is no denying that the point-to-point inflation which, according to the Bangladesh Bureau of Statistics-BBS-statistics after a sharp decline in the months of April and May last to 7.44 per cent from over 10 per cent in the previous months shot up to 10.82 per cent. Inflation, thus, should be a major concern for the central bank, particularly when the year-on-year growth of credit to the private sector was nearly 26 per cent as of June 30 last. But the central bank refrained itself from adopting tight monetary policy when point-to-point inflation was even higher last year. Moreover, the prices of many food items, including edible oils, onions, potatoes etc., have eased in recent weeks that witnessed no supply-side constraints. Traders expect further fall in prices of essentials after the month of holy Ramadan. However, the BB action might have come to enforce some restraint on the flow of money on the eve of the Eid festival when people spend a substantial amount on purchases of clothes, footwear and household goods.
Another plausible reason for the central bank to impose the restriction is the greater dependence of a section of banks on the central bank for funds. Repo, of late, has become a source of easy money for these banks, which are, reportedly, extending risky credits crossing the safe-limit set by the central bank. Most private commercial banks are found lending more than 82 per cent of their individual deposits and some 'dare-devil' banks do reportedly lend more than their total deposits. The BB does have a responsibility to straighten things up as far as erratic lending by banks is concerned. But while discharging this responsibility, the BB should also be mindful of the needs for bank credits at affordable costs, for supporting investment and growth of the real sectors of the economy. The BB does require to make a balance between the two jobs.
But, as expected, the bankers are unhappy with the latest central bank action. For, a good number of banks, already facing liquidity shortfall, might face problems in offering fresh loans. Repo rate affects the lending operations of the commercial banks through its effects on the availability of fund for making credits. Bankers argue that the BB action would hurt industrial growth, squeezing credit to key sectors such as garments and textile, agriculture and capital machinery import. The Repo rate hike is likely to affect consumers' credit, home loan and loans to other unproductive schemes more than any other areas, notwithstanding the fact that these schemes do also make positive contributions to the economy. Talking to this daily, a research economist echoed the sentiment of the bankers saying that the BB had tried monetary instruments to tame inflation three years back but without any outcome.
There is no denying that the point-to-point inflation which, according to the Bangladesh Bureau of Statistics-BBS-statistics after a sharp decline in the months of April and May last to 7.44 per cent from over 10 per cent in the previous months shot up to 10.82 per cent. Inflation, thus, should be a major concern for the central bank, particularly when the year-on-year growth of credit to the private sector was nearly 26 per cent as of June 30 last. But the central bank refrained itself from adopting tight monetary policy when point-to-point inflation was even higher last year. Moreover, the prices of many food items, including edible oils, onions, potatoes etc., have eased in recent weeks that witnessed no supply-side constraints. Traders expect further fall in prices of essentials after the month of holy Ramadan. However, the BB action might have come to enforce some restraint on the flow of money on the eve of the Eid festival when people spend a substantial amount on purchases of clothes, footwear and household goods.
Another plausible reason for the central bank to impose the restriction is the greater dependence of a section of banks on the central bank for funds. Repo, of late, has become a source of easy money for these banks, which are, reportedly, extending risky credits crossing the safe-limit set by the central bank. Most private commercial banks are found lending more than 82 per cent of their individual deposits and some 'dare-devil' banks do reportedly lend more than their total deposits. The BB does have a responsibility to straighten things up as far as erratic lending by banks is concerned. But while discharging this responsibility, the BB should also be mindful of the needs for bank credits at affordable costs, for supporting investment and growth of the real sectors of the economy. The BB does require to make a balance between the two jobs.