BB's rate hike likely to hit economy, may not achieve inflationary goal
Friday, 19 September 2008
Siddique Islam and Mushir Ahmed
The central bank's hike of key policy interest rate is likely to hit growth of industry and agriculture and may not achieve its main goal to contain inflationary pressure, senior bankers and a leading economist said Thursday.
Bankers said private sector credit which grew at a sizzling rate of around 26 per cent year-on-year in July would slow down as some banks --- already facing liquidity shortfall --- would find it hard to provide fresh loans.
Their comments came a day after the Bangladesh Bank (BB) increased its repo rate --- the key short term interest rate --- by 25 percentage points in an effort to rein in runaway inflation.
The interest rate on repurchase agreement (Repo) auction was re-fixed at 8.75 per cent Wednesday from 8.50 per cent for lending fresh funds to commercial banks and non-banking financial institutions (NBFIs).
The International Monetary Fund, which in July asked the BB to tighten money supply, welcomed the move as timely, saying it would help curb inflationary trend in the economy.
A chief executive officer of a leading financial institution said the move would slow down industrial expansion, squeezing credit for the key 'productive' sectors such as garments, textile and agriculture and import of capital machinery.
"No doubt, the move is going to hit the industry. The credit would be costlier for the real entrepreneurs. Some banks and non-banking financial institutions, which have been facing liquidity problem, may face new fund crisis," he said.
A top private banker said consumer loans such as car loans, any purpose loans, personal loans would be the main casualty of the central bank's key policy rate hike.
"Credits for car purchases or any purpose will be costlier, he said, adding the banks, which depend hugely on 'repo', would be the most affected.
The BB's move came a day after the Asian Development Bank (ADB) suggested that the government increase the bank interest rate and take a tight monetary policy to tame inflation, which hit 10.82 per cent in July, a fresh six-month high.
A Central bank executive director rejected the private bankers' criticism, saying the rate hike would only discourage credit flow to the non-productive sectors such as purchase of luxury goods, but not the productive ones.
"We are confident that the rate hike will not hamper the growth of the productive sectors such as manufacturing and agriculture," he said.
"Our target is to curb inflation, which has become stubbornly high and is adversely affecting the economy. If we can successfully check inflation, it will eventually bring good to every sector in the economy," he added.
The central bank said credit to the private sector rose by 25.18 per cent to Tk 379.62 billion in July-June period of FY08 from 15.12 per cent to Tk 197.98 billion of the previous fiscal.
Economist Zaid Bakht of Bangladesh Institute of Development Studies disagreed with the central bank officials that the rate hike would curb inflation.
"Three years back the central bank did the same thing. But it did not work. I am not sure how much it will help this time around. I think the timing was not appropriate to adopt contractionary monetary policy," he said.
Bakht said inflation was high in the country due to supply side constraints, lack of government intervention in the market, and higher government expenditure, and spending spree ahead of Eid and the elections.
"Instead of curbing inflation, the central bank's move may slow down growth and discourage long term investment. The move may backfire eventually," he said.
The BB officials maintained an accommodative monetary policy for nearly one year aiming to achieve maximum economic growth through expansion of credit to the productive sectors while keeping inflationary pressures under control.
The central bank's hike of key policy interest rate is likely to hit growth of industry and agriculture and may not achieve its main goal to contain inflationary pressure, senior bankers and a leading economist said Thursday.
Bankers said private sector credit which grew at a sizzling rate of around 26 per cent year-on-year in July would slow down as some banks --- already facing liquidity shortfall --- would find it hard to provide fresh loans.
Their comments came a day after the Bangladesh Bank (BB) increased its repo rate --- the key short term interest rate --- by 25 percentage points in an effort to rein in runaway inflation.
The interest rate on repurchase agreement (Repo) auction was re-fixed at 8.75 per cent Wednesday from 8.50 per cent for lending fresh funds to commercial banks and non-banking financial institutions (NBFIs).
The International Monetary Fund, which in July asked the BB to tighten money supply, welcomed the move as timely, saying it would help curb inflationary trend in the economy.
A chief executive officer of a leading financial institution said the move would slow down industrial expansion, squeezing credit for the key 'productive' sectors such as garments, textile and agriculture and import of capital machinery.
"No doubt, the move is going to hit the industry. The credit would be costlier for the real entrepreneurs. Some banks and non-banking financial institutions, which have been facing liquidity problem, may face new fund crisis," he said.
A top private banker said consumer loans such as car loans, any purpose loans, personal loans would be the main casualty of the central bank's key policy rate hike.
"Credits for car purchases or any purpose will be costlier, he said, adding the banks, which depend hugely on 'repo', would be the most affected.
The BB's move came a day after the Asian Development Bank (ADB) suggested that the government increase the bank interest rate and take a tight monetary policy to tame inflation, which hit 10.82 per cent in July, a fresh six-month high.
A Central bank executive director rejected the private bankers' criticism, saying the rate hike would only discourage credit flow to the non-productive sectors such as purchase of luxury goods, but not the productive ones.
"We are confident that the rate hike will not hamper the growth of the productive sectors such as manufacturing and agriculture," he said.
"Our target is to curb inflation, which has become stubbornly high and is adversely affecting the economy. If we can successfully check inflation, it will eventually bring good to every sector in the economy," he added.
The central bank said credit to the private sector rose by 25.18 per cent to Tk 379.62 billion in July-June period of FY08 from 15.12 per cent to Tk 197.98 billion of the previous fiscal.
Economist Zaid Bakht of Bangladesh Institute of Development Studies disagreed with the central bank officials that the rate hike would curb inflation.
"Three years back the central bank did the same thing. But it did not work. I am not sure how much it will help this time around. I think the timing was not appropriate to adopt contractionary monetary policy," he said.
Bakht said inflation was high in the country due to supply side constraints, lack of government intervention in the market, and higher government expenditure, and spending spree ahead of Eid and the elections.
"Instead of curbing inflation, the central bank's move may slow down growth and discourage long term investment. The move may backfire eventually," he said.
The BB officials maintained an accommodative monetary policy for nearly one year aiming to achieve maximum economic growth through expansion of credit to the productive sectors while keeping inflationary pressures under control.