Does Bangladesh Bank want to tread the same path, again?

It is not clear why a movement of funds from stock market to deposits and saving certificates, if it had occurred at all, should have reduced investment. Money invested in saving certificates is available to the government to fund its investment projects. Time deposit money are lent out by banks to their business clients to fund working and fixed capital needs.
The decision to save and the decision to invest are independent decisions taken by different sets of people for different reasons, and the motivation of one does not necessarily impinge on the motivation of the other. A large number of surveys have been conducted by domestic and international organisations on investment issues in recent years, and none of them has found the state of the share market as an important impediment to business investment decision. The very bullish share market during the period between 2007 and 2010 did not help raise the gross domestic investment ratio of the country, indeed it declined marginally. In contrast, the 2010 crash was followed by a very significant increase in the investment ratio. Physical and social infrastructure, domestic and world demand, policies, skill and business expectations play a dominant role in determining the volume of investment.
The rates on National Savings Directorate's (NSD's) saving certificates are set arbitrarily by the Ministry of Finance (MoF), but the rates on time deposits are determined largely by market forces. There are a large number of private banks in the country and it is unlikely that there is collusion among them to set the rate at a high or low level. However, Bangladesh Bank (BB) can influence the market interest rate through an appropriate deployment of monetary policy instruments in accordance with its objectives.
It is, therefore, confusing who the Chief Economist (CE) of BB was urging to reduce the deposit rates. Interest rates are determined by the monetary policy of the country. The monetary policy stance has been set for the first half of 2015 by the Monetary Policy Statement or MPS of BB declared in January. Was the exhortation to reduce rates meant to be a signal to the market of a significant loosening of monetary policy during the next half of the year? The domestic inflation rate has been creeping up since the beginning of the year despite significant reductions in the international food and fuel prices. Is an expansionary monetary policy in this situation advisable?
The financial crises in the western world caused by asset market bubbles have spawned a lively debate regarding whether the central bank should take counter-measures when a bubble is forming. The discussion is understandably difficult and without a consensus. It is interesting that while economists are more liberal in suggesting that the central banks should intervene in the assets markets in order that the bubbles are prevented from forming or growing too large, the central bankers by and large are more circumspect about intervention. They advise that central banks should not indulge in bubble-pricking for a number of reasons.
First, the central bank has only one instrument at its disposal, i.e. the interest rate or the reserve money supply. This is deployed to attain its inflation target. Any additional objective, such as asset prices, can be addressed without sacrificing the inflation target only fortuitously. When both objectives cannot be achieved simultaneously the central bank should not be so burdened since it may then fail to attain any of the targets, which will dent its credibility.  
Second, there are many assets in the economy. If all asset prices are fortuitously moving in the same direction, the policy choice is less problematic. But if they are moving in opposite directions, what should be the target of policy? If a housing market bubble occurs at a time when the foreign exchange rate is depreciating and export industries are facing difficulties, is bubble-pricking by an increase in the interest rate desirable?
Third, any feasible interest rate increase may be insufficient to douse the enthusiasm of the asset market participants expecting much higher returns in a bubble-driven market.
Fourth, such interventions lead to moral hazard problems.
Last, but not the least, is the Greenspan doctrine which warn that it is very difficult to identify a bubble, and it is very easy to mistake a genuine market correction as a bubble. It is also possible that asset prices reflecting market fundamentals could be mistaken as indicators of a depressed market. The cost of corrective measures based on incorrect diagnosis could be very high.
The strength of this cautious approach should be evident if the CE was incorrect in assuming that the stock market was in a depressed state. It is possible that the market has undergone some major downward market corrections and the DSEX index is now at about the value that correctly reflects the underlying fundamentals. If the latter happens to be the case, and BB were to intervene by reducing the interest rates, a bubble will be in the making. It may gain momentum to become a full-blown bubble in future.
The very forces that persuaded BB to reduce interest rates arguing that the market was depressed ought to be able to also persuade it not to hike rates when the market is buoyant. The bubble will eventually burst with all the attendant problems, and BB will be held culpable. Many experts still hold the view that BB had in effect assisted in creating the 2010 stock market bubble by sharply increasing money supply in fiscal year (FY) 2009-10 and FY 2010-11 (or reducing the interest rates), and permitting banks to deal in shares. Does it want to tread the same path again?  
 The writer is Professor of Economics, University of Dhaka.   [email protected]