Ex-BB governor suggests supply side improvement
Saturday, 6 February 2010
Sheikh Shahariar Zaman
Bangladesh Bank (BB) should act cautiously in putting pressure on banks to bring down the lending rate to single digit, as there is a trend of rising inflation, said former governor Dr Salehuddin Ahmed
The government and the central bank are often asking the commercial banks to bring down the lending rate to single digit to give some respite to manufacturing and other sectors, he told the FE.
He said if the banks want to reduce the lending rate, they have to reduce the deposit rate as it is their primary source of investible funds.
"If the deposit rate is equal to inflation or falls below that, people will not feel encouraged to save money," he said.
The former BB governor explains "If the deposit rate is 7 per cent and inflation rate at 7.5 per cent, the real value of the deposit will decline next year.
The point-to-point inflation hit 7.24 per cent in November with the food inflation in urban areas reaching 9.83 per cent during the period against 6.48 per cent in the same period in 2008.
In September, the weighted average deposit rate of the scheduled banks was 6.57 per cent.
Dr Salehuddin said price hike in the international market and strong Indian rupee are putting pressure in the price level in the domestic market and it is expected that it may exceed 7 per cent in the current fiscal.
The government should improve the supply side situation to contain inflation before taking any action to reduce interest rate, he suggested.
The central bank in its monetary policy announced last month the ceilings on interest rates on loans for some priority productive purposes.
City Bank managing director Mahmud Sattar said there would be serious consequences if the deposit rate falls below inflation.
"Everybody is asking us to reduce the interest rate, but even if we reduce the rate, will there be any guarantee that investors will invest," he said.
People are investing in speculative sectors like stock market and real estate to get more return of their savings, he added.
Mr Sattar said the banks are in dilemma as on the one hand the central bank is asking them to implement Basel II accord and on the other, putting cap on lending rate to 13 per cent for some selected sectors.
"How can we implement the Basel II if we do not have liberty to fix our lending rate?" he questioned.
A central bank official said the Bangladesh Bank wants to reduce the lending rate to single digit in medium term.
"We are not asking them to reduce the rate in short-term as we are aware of the macroeconomic indicators," he said.
He said people will not divert their savings from the banks if the real deposit rate is negative as many of them keep the money in the banks for security reason.
About inflation, he said in November the point-to-point inflation was over 7 per cent, but the central bank expects that the average inflation will be within the limit of 6.5 per cent in the current fiscal.
Bangladesh Bank (BB) should act cautiously in putting pressure on banks to bring down the lending rate to single digit, as there is a trend of rising inflation, said former governor Dr Salehuddin Ahmed
The government and the central bank are often asking the commercial banks to bring down the lending rate to single digit to give some respite to manufacturing and other sectors, he told the FE.
He said if the banks want to reduce the lending rate, they have to reduce the deposit rate as it is their primary source of investible funds.
"If the deposit rate is equal to inflation or falls below that, people will not feel encouraged to save money," he said.
The former BB governor explains "If the deposit rate is 7 per cent and inflation rate at 7.5 per cent, the real value of the deposit will decline next year.
The point-to-point inflation hit 7.24 per cent in November with the food inflation in urban areas reaching 9.83 per cent during the period against 6.48 per cent in the same period in 2008.
In September, the weighted average deposit rate of the scheduled banks was 6.57 per cent.
Dr Salehuddin said price hike in the international market and strong Indian rupee are putting pressure in the price level in the domestic market and it is expected that it may exceed 7 per cent in the current fiscal.
The government should improve the supply side situation to contain inflation before taking any action to reduce interest rate, he suggested.
The central bank in its monetary policy announced last month the ceilings on interest rates on loans for some priority productive purposes.
City Bank managing director Mahmud Sattar said there would be serious consequences if the deposit rate falls below inflation.
"Everybody is asking us to reduce the interest rate, but even if we reduce the rate, will there be any guarantee that investors will invest," he said.
People are investing in speculative sectors like stock market and real estate to get more return of their savings, he added.
Mr Sattar said the banks are in dilemma as on the one hand the central bank is asking them to implement Basel II accord and on the other, putting cap on lending rate to 13 per cent for some selected sectors.
"How can we implement the Basel II if we do not have liberty to fix our lending rate?" he questioned.
A central bank official said the Bangladesh Bank wants to reduce the lending rate to single digit in medium term.
"We are not asking them to reduce the rate in short-term as we are aware of the macroeconomic indicators," he said.
He said people will not divert their savings from the banks if the real deposit rate is negative as many of them keep the money in the banks for security reason.
About inflation, he said in November the point-to-point inflation was over 7 per cent, but the central bank expects that the average inflation will be within the limit of 6.5 per cent in the current fiscal.