Global & local contexts of monetary policy for H1FY25

According to the International Monetary Fund (IMF)’s recent World Economic Outlook (April 2024), global GDP growth, which was 3.2 per cent in 2023, is projected to remain unchanged at 3.2 per cent in both 2024 and 2025. This growth rate is still below the historical average, reflecting critical factors such as high borrowing costs, withdrawal of fiscal support, weak productivity growth, the Russia-Ukraine war, and increasing geopolitical and geo-economic fragmentation.
For advanced economies, GDP growth is expected to rise slightly from 1.6 per cent in 2023 to 1.7 per cent in 2024 and 1.8 per cent in 2025, driven by strong growth momentum in the United States (US) and weaker-than-expected expansion in the euro area.
Emerging markets and developing economies are projected to experience a slight slowdown, with growth decreasing from 4.3 percent in 2023 to 4.2 per cent in both 2024 and 2025, primarily due to China’s ongoing property sector crisis. However, in South Asia, Bangladesh and India are expected to maintain robust GDP growth rates exceeding 6.0 per cent in 2025.
The Asia and Pacific region showed strong resilience in 2023, contributing nearly two-thirds of global growth. This robust performance overcame several significant challenges, such as potential spillovers from China’s property market correction, weak external conditions, and persistently high monetary policy rates. Although export demand in the region was generally sluggish in 2023, there is now greater optimism for export growth, primarily due to increased US import demand.
Inflation in Asia and the Pacific has eased and remains lower than in the rest of the world. This is attributed to appropriate monetary tightening, temporary price controls, and subsidies that have reduced commodity price pressures. Inflation is expected to align with central bank targets by the end of 2024 in most countries in the region. According to the Regional Economic Outlook for Asia and the Pacific (April 2024), growth in the region is projected to be 4.5 per cent in 2024, down from 5.0 per cent in 2023. This growth rate is expected to further ease to 4.3 percent in 2025.
Global headline inflation decreased from 8.7 percent in 2022 to 6.8 percent in 2023, primarily due to declining fuel and energy prices and monetary tightening in both advanced and emerging market economies. Projections indicate that headline inflation will further decline from 6.8 per cent in 2023 to 5.9 per cent in 2024 and 4.5 per cent in 2025.
Advanced economies are expected to see inflation drop from 4.6 per cent in 2023 to 2.6 per cent in 2024, driven by lower commodity prices and the effects of monetary policy tightening. In contrast, emerging market and developing economies are projected to maintain a relatively higher inflation rate of 8.3 per cent in 2024, expected to decline to 6.2 per cent in 2025. The more noticeable pace of disinflation in advanced economies reflects their robust monetary policy frameworks, effective communications, and lower susceptibility to shocks in commodity prices and exchange rates.
The IMF forecasts that inflation will likely exceed targets in most countries in 2024 but is expected to approach these targets by 2025 as global commodity prices and oil prices decrease. Regarding price indices, the global food price index has shown a consistent decline since July 2022, except for the rice price index, which rose from early 2022 until January 2024. The rice price index remained stable, with some fluctuations during February-June 2024. The energy price index has been on a downward trend with occasional volatility in recent months, while the price index for non-energy commodities exhibited relative stability until June 2024.
Following the pandemic, long-term interest rates have steadily risen in most advanced countries. This upward trend peaked in October 2023, reflecting central banks’ proactive measures to tighten policies in response to persistent inflationary pressures. The Bank of Japan notably raised the upper limit of the 10-year Japanese government bond yield from 0.5 percent to above 1 percent, enabling unlimited purchases to support sustained monetary easing. The UK and Eurozone have raised policy rates from early 2022 through August 2023 to counter mounting inflationary pressures. The US followed suit, increasing its policy rate until July 2023 before pausing due to slowing inflation rates.
However, with inflation remaining above target this year, the prospects for policy rate cuts in the US and UK have diminished. In contrast, long-term interest rates and policy rates in peer countries such as India, Pakistan, and Sri Lanka have remained mostly unchanged in recent periods.
Local Context
Growth and Inflation: Bangladesh’s economy has demonstrated notable resilience and strong growth in the post-pandemic era, with real GDP expanding by 6.94 per cent in FY21 and 7.10 per cent in FY22. The recovery was driven by significant progress in the industrial and service sectors, supported by robust domestic and international demand. However, growth moderated to 5.78 per cent in FY23, influenced by persistent high inflation, substantial depreciation of the Bangladesh Taka (BDT), and challenges stemming from the Russia-Ukraine conflict, global uncertainty, and adverse conditions such as slower-than-expected growth and rising inflation in key trade partners and remittance sources. Despite these challenges, growth saw a modest rebound to 5.82 per cent in FY24, as per provisional estimates from the Bangladesh Bureau of Statistics (BBS).
The services and agricultural sectors are expected to maintain steady growth throughout FY25, promising solid economic support. Historically, the industrial sector is one of the key contributors to domestic output and is anticipated to drive growth in the coming fiscal year. Agriculture will also play a significant role, boosted by favourable weather conditions and successful harvests. A more stable and market#oriented exchange rate environment could benefit the external sector, highlighted by a recent surge in workers’ remittances and expectations of increased exports.
Looking ahead to FY25, Bangladesh’s economy shows positive signs with strong industrial growth, stable service and agriculture sectors, and rising private demand. Remittance inflows and steady growth in Ready-Made Garments (RMG) exports are expected to contribute positively. The export sector, especially RMG, is set to benefit from higher global demand, while moderating global prices may benefit the import sector. The Government’s proactive efforts to promote agricultural and industrial production, along with infrastructure projects, are likely to create further growth opportunities. Combined, these factors bolster the country’s growth outlook. Forecasts indicate that the economy aims to regain momentum, targeting a robust growth rate of around 6.75 per cent for FY25, as outlined in the national budget and supported by assessments from domestic and international agencies, including the Bangladesh Bank (BB).
While global prices have moderated due to improved supply conditions and stable food and energy prices, Bangladesh’s market has not fully adjusted. This is primarily due to rigid domestic prices, market imperfections due to lack of competition, supply-side disruptions due to non-economic factors, increases in fuel and energy costs, and significant depreciation of the local currency, countering potential benefits from lower global prices.
The CPI-based inflation surged notably in the first quarter of FY23 due to significant rises in fuel and energy prices alongside global inflationary trends. Chart 13 illustrates the 12-month average headline inflation trend covering food and non-food components since June 2020. From November 2021 onwards, there has been a consistent upward trend in the 12-month average CPI inflation. By the end of FY23, average headline inflation rose to 9.02 per cent and has remained above 9.0 per cent since June 2023, reaching 9.73 percent in June 2024.
Meanwhile, the 12-month average core inflation shows signs of moderation, reaching a peak of 8.62 per cent in July 2023 and 7.36 percent in June 2024. Global inflationary pressures and subsequent tightening of monetary policies worldwide drove this initial inflation surge. Internal factors such as inflexible price adjustments and persistent domestic currency depreciation also contributed. The inflationary pressures and significant price increases were observed in essential goods during FY23 and FY24.
Considering the top priority of controlling inflation, the Bangladesh Bank continued its successive monetary tightening, adopting a market-based interest rate framework while ceasing the money printing through devolvement to support government spending.
An anticipated improvement in the supply-side dynamics, supported by various supply-side interventions, is projected to lead to a decline in the inflation rate, stabilising it at a manageable level in the coming months. Furthermore, the tightening measures implemented by BB, and relatively higher base of the CPI will bring to moderation effect on inflation. Despite these efforts, achieving the target of 6.5 per cent inflation by the end of FY25 remains challenging.
Liquidity and Interest Rate: Bangladesh’s banking sector has experienced a tight liquidity scenario since June 2021 due to substantial UDS sales by BB that absorbed a significant amount of local currency. Subsequently, implementing contractionary monetary policy to combat inflationary pressure further exerted the tight liquidity situation in the banking sector. Besides, the slower growth in deposits compared to the rapid expansion of lending, sluggish loan recovery leading to the persistent burden of non-performing loans (NPLs), increased cash holding by the public, and the government borrowing from commercial banks have also contributed to the tightening liquidity situation. Meanwhile, the liquidity situation has improved since February 2024, owing to various initiatives taken by BB. These are: (i) BB reduced net sale of foreign currency in the foreign exchange market during January-June 2024 compared to July-December 2023; (ii) BB facilitated the full allotment of repo facilities to commercial banks and non-bank financial institutions based on their demand; (iii) the arrangement of Dollar-Taka SWAP with commercial banks to inject liquidity in the domestic market.
BB’s contractionary monetary policy-driven tight liquidity situation in the money market has led to a gradual increase in interest rates in the money market. The weighted average call money rate experienced a significant increase, rising from 6.06 per cent in June 2023 to 9.08 per cent by June 2024.
Furthermore, the interbank repo rate also increased from 6.16 per cent in June 2023 to 8.56 per cent in June 2024. The movement seen in the call money rate is in line with BB’s implementation of an interest rate corridor as part of its modernisation of monetary policy.
In order to maintain stability in the financial market, BB has diligently been engaged in providing liquidity support in the local currency market through various instruments, including Repo facilities, Assured Repo (AR), Assured Liquidity Support (ALS), Liquidity Support against claims of Remittance(LSR) and Standing Lending Facilities (SLF) for conventional banks and non-bank financial institutions. BB has also continued its support for Shariah-based Islamic banks through Mudarabah Liquidity Support (MLS), Islamic Banks Liquidity Facility (IBLF), and Special Liquidity Support (SLS).
Furthermore, BB is also actively providing refinancing and pre-financing facilities specifically designed to support the growth of important sectors such as agriculture and CMSMEs (Cottage, Micro, Small, and Medium Enterprises). These strategic measures have a dual focus: ensuring enough liquidity while promoting employment opportunities and stimulating output-generating activities. The liquidity situation in the banking system has slightly improved due to several initiatives taken by BB, as explained earlier.
Available data show that total excess liquidity in the banking system reached Tk 1,74,248 crore by the end of May 2024 from Tk. 1,66,288 crore in June 2023. Given the current liquidity constraints in the local currency market, interest rates across various financial products have increased noticeably, notably in weighted average nominal lending and deposit rates and interest rates on short—and long-term government securities.
According to the latest data, the weighted average lending rate for the large industry sector rose from 7.23 per cent in June 2023 to 11.35 per cent in May 2024. Lending rates for the SME and agriculture sectors also increased significantly, from 6.99 per cent and 7.48 per cent in June 2023 to 11.46 per cent and 11.31 per cent, respectively, by May 2024. Similarly, deposit rates for terms of less than one year and above three years were 8.46 per cent and 8.34 per cent, respectively, at the end of May 2024, up from 6.56 per cent and 7.62 per cent in June 2023.
Considering the dynamics of the money market and the smooth transmission of monetary policy, BB abolished the reference lending rate SMART to move towards a market-based interest rate. Now, Banks can set their interest rates based on demand and supply in the market along with the banker-customer relationship. Moreover, BB has already introduced a repo auction twice a week and provides a full allotment of funds demanded by the banks/NBFIs at the policy rate for streamlining OMOs from July 2024. Looking ahead, BB’s ongoing efforts to control inflation through various policy measures, such as implementing a contractionary monetary policy and transitioning to a market-based interest rate, are expected to significantly impact real interest rates as well.
External Sector Developments and Outlook: Elevated global commodity prices, the spillover effects of tight monetary policies in the USA and other advanced economies, and geopolitical conflicts in the Middle East and Europe have collectively stressed Bangladesh’s external sector. However, the pressure on the external position eased somewhat in the latter part of H2FY24. This relief was due to policy responses, including continued monetary and fiscal tightening, realignment of the exchange rate marked by significant depreciation, and shifting to a crawling peg exchange rate arrangement.
These developments were reflected in improving the balance of payments (BoP), increasing interbank foreign exchange transaction turnover, and recovering foreign exchange reserves by the end of FY24.
According to the latest BoP statistics, the overall BoP deficit moderated in July 2023-May 2024, with the current account balance (CAB) deficit significantly reducing closer to its usual trend. However, the surplus in the financial account slightly declined during this period. The CAB deficit narrowed to USD 5.98 billion in July 2023-May 2024, down from USD 12.02 billion during the same period of the previous fiscal year. This improvement resulted from a sharper contraction in imports than exports and a pickup in remittances inflows due to Eid festivals and the realignment of the exchange rate.
High inflation in advanced economies, the war-induced economic slowdown in Europe, and surging shipping costs due to the Red Sea conflict dampened Bangladesh’s exports in FY24. According to revised export data, total exports declined by 4.28 per cent year-on-year to USD 40.73 billion in July 2023-May 2024, down from USD 42.55 billion in the first eleven months of FY23. The export sector was heavily reliant on ready-made garments (RMG), which declined by 5.2 per cent in this period. Imports continued to slow amid notable currency depreciation, several import compression measures, higher borrowing costs due to tight monetary policy, fiscal contraction, and strict monitoring of import over invoicing. However, the pace of import deceleration eased somewhat in FY24. Total imports decreased by 13.19 per cent year-on-year in the July 2023-May 2024 period, slightly less than the 14.15 per cent dip in the corresponding period of FY23. The downturn in imports was primarily concentrated in raw materials and capital machinery.
Supported by several policy measures and significant exchange rate realignment, the inflow of workers’ remittances recovered strongly in recent months, particularly ahead of the Eid festivals. Remittance inflows grew notably by 10.66 per cent in FY24, providing respite for the balance of payments (BoP). Despite a historically healthy surplus, the financial account saw a decline, dwindling to USD 2.08 billion in the first eleven months of FY24 from USD 5.52 billion in the same period of FY23.
This downtrend was driven largely by a reversal of net trade credit to a deficit due to delayed repatriation of export receipts and higher repayment of short-term private external borrowings amidst high global borrowing costs and economic uncertainties. Despite the deterioration of the financial account surplus, the narrowing current account deficit resulted in an overall BoP improvement. The overall BoP deficit was reduced to USD 5.88 billion in July 2023-May 2024 from a high of USD 8.80 billion in the corresponding period of FY23.
Looking ahead, the overall BoP position is expected to stabilize with ongoing monetary and fiscal contraction and exchange rate realignment. The current account balance (CAB) may continue to improve with recovering remittance inflows and further reduction of the trade deficit following exchange rate adjustments. The financial account is also likely to regain momentum with a reversal of trade credit due to the potential acceleration of export proceeds repatriation induced by necessary exchange rate corrections and a rise in foreign assistance inflows in the form of budget support and development project aids.
However, this outlook is fraught with uncertainties and risks tilted to the downside. Increasing repayments of the Government’s foreign debt may pose additional pressure on the BoP in the future. Moreover, elevated geopolitical risks stemming from conflicts in the Middle East and Europe could hamper export demand and increase global food and energy prices, adversely affecting Bangladesh’s BoP.
Exchange Rate and Foreign Exchange Reserve: The balance of payments (BoP) deficit exerted significant pressure on the exchange rate in FY24. Bangladesh Bank (BB) initially responded by allowing more flexibility in the exchange rate while intervening in the foreign exchange market through net sales to restore external balance and stabilise the foreign exchange market. Despite a notable 15.05 per cent depreciation of the BDT against the USD from July 2022 to December 2023, liquidity mismatches in the interbank foreign exchange market and the BoP deficit persisted. This demand-supply gap in the foreign exchange market compelled BB to sell a net total of USD 9.42 billion in FY24, resulting in a decline in foreign exchange reserves. Consequently, BB’s foreign exchange reserves as per BPM6 tapered from USD 24.75 billion at the end of FY23 to USD 21.78 billion at the end of FY24.
The ongoing large BoP deficit and reserve depletion necessitated greater exchange rate flexibility to clear the market. Accordingly, on 8 May 2024, BB realigned the exchange rate closer to the market-clearing level at 117 BDT/USD, allowing 5.98 per cent depreciation from 110 BDT/USD, culminating in a total 8.17 per cent depreciation in FY24. Simultaneously, BB adopted a crawling peg exchange rate system as an interim measure before transitioning to a fully flexible exchange rate system. The crawling peg system generally provides exchange rate stability with flexibility within a band to manage short-term shocks, helps mitigate exchange rate risks and inflation expectations, and cushions against foreign exchange reserve depletion. The introduction of this new regime led to increase in liquidity in the foreign exchange market, reflected in the turnover of interbank foreign exchange transactions, thereby restoring reasonable stability in the foreign exchange market.
Although the nominal exchange rate of BDT/USD depreciated by 8.17 per cent in FY24, the nominal effective exchange rate (NEER) experienced a milder depreciation of 5.24 per cent. This discrepancy resulted from the lesser depreciation of some major currencies in the currency basket against USD during this period. The nominal depreciation effectively offset the inflation differential between Bangladesh and its major trade partners, keeping the real effective exchange rate (REER) index slightly below 100 in June 2024. This indicates that the Taka#Dollar exchange rates remained moderately undervalued, with no significant appreciation or depreciation pressure on the nominal exchange rate.
Capital and Bond Market: The government’s ongoing mega projects and public-private partnership investments in strategic sectors like energy, power, and transportation highlight the need for a well-developed capital market. In collaboration with BB and other regulatory authorities, the Bangladesh Securities and Exchange Commission (BSEC) is committed to developing the country’s capital and bond markets.
In the secondary market, 241 government treasury bonds were actively traded until May 2024, marking a significant step in bond market development. BB introduced the Financial Market Infrastructure (FMI) system on 2 June 2024 to further enhance the secondary market for government securities. This system aims to improve monetary policy transmission by offering more efficient liquidity and buy-sell options for primary dealers alongside repo, standing liquidity, and standing deposit facilities.The Government of Bangladesh has raised Tk. 18,000 crore through three investment sukuk in recent years, BB plans to issue a fourth Ijara sukuk with a five-year duration and a nominal value of Tk. 1000 crore. This Sukuk can be used by banks and NBFIs as part of their statutory liquidity reserve (SLR), allowing Islamic banks to contribute actively to monetary management.
A new yield curve for treasury bonds has been introduced to facilitate a dynamic secondary market. It incorporates market-oriented valuations based on actual transactions and daily two-way price quotes from primary dealers. Banks are now required to use secondary market yields for the mark-to-market revaluation of treasury bonds held for trading (HFT), while treasury bills will still rely on primary market yields.
The BSEC has prepared the Real Estate Investment Trust (REIT) Fund Rules 2024, opening up new investment opportunities in the real estate sector through the capital market. To address economic challenges, BB allows banks and NBFIs to calculate their capital market exposure based on investment cost rather than market prices, enhancing their investment capacity. Additionally, the BSEC extended the time limit for provisioning against unrealised losses for stock brokerage and merchant banks’ client portfolios until 31 January 2025.
To support liquidity in the stock market, the Capital Market Stabilization Fund (CMSF) has partnered with a domestic private bank to provide BDT 100 crore in loans to intermediaries such as stock brokers, stock dealers, merchant banks, and asset management companies at a competitive interest rate of 8.25 per cent.

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