Inflation worry forces BB to continue tightfisted monetary management

The Bangladesh Bank (BB) continues to pursue contractionary monetary stance to manage inexorable inflation and financial constraints retaining the regulatory lending rate high at 10 per cent.
Despite calls from businesses to lower the policy rate, the BB has retained the previous rate unchanged with a hope that inflation would drop to 7.0-8.0 per cent by June -- the end of the current fiscal year -- in the half-yearly monetary policy statement or MPS.
The Standing Lending Facility (SLF) rate will remain at 11.5 per cent, while the Standing Deposit Facility (SDF) rate will stay at 8.5 percent, maintaining a policy rate corridor of ±150 basis points.
"The monetary policy will remain tight (contractionary) until June," Dr Ahsan H. Mansur, Governor of Bangladesh Bank, told reporters at the central bank headquarters during the rollout of the MPS for second half (H2) of this fiscal.
Since taking office after the August changeover in state power, the governor has increased the policy rate thrice, by a total of 150 basis points, in an effort to contain persistently high inflation, which significantly impacts the living of low-income groups for price spikes.
So far, inflation has declined by 1.5-percentage points since these frugal measures were introduced.
This monetary-policy statement differs from previous ones in that it highlights inflationary challenges that were previously downplayed.
It identifies key challenges, including global economic uncertainties and domestic political instability, stressing the need for vigilance and proactive policymaking.
The central bank also notes that private-sector-credit growth remains subdued at 7.3 per cent, but it expects this figure to rise closer to 10 per cent by June following gradual loosening of fists.
Once private-sector credit reaches nearly 10-percent mark, the central bank believes its monetary stance will align with government's latest GDP-growth projection of 5.0 percent or higher, said Dr Habibur Rahman, a deputy governor, who presented the keynote at the function.
Dr Mansur notes monetary-policy actions take time to be transmitted into the economy, typically requiring 12 to 18 months.
The governor feels that the exchange rate is now stable and the balance of payments (BoP) remains at a satisfactory level.
"Our overall balance of payments (BoP) could have been in surplus, but we have settled previous dues, leading to a small overall deficit despite the current account remaining surplus in July-December period," said Dr Mansur, for whom it happens to be first monetary policy statement after becoming Governor of Bangladesh Bank.
Further listing state of macroeconomic factors he said LC (letter of credit) pressures were high in December and January, mainly due to Ramadan and Hajj-related payments, but assured that these stresses had already been managed and reserves remained stable.
Turning to agriculture, the governor struck a note of optimism that the upcoming Boro harvest would be strong, as fertilizer-related issues have been resolved.
On remittances, he noted that even in the first week of February, inflows remained satisfactory, adding that remittances increased by 24 per cent so far.
Dr Mansur estimates that Bangladesh could earn an additional $6.0 billion from remittances and another $5.0 billion from exports in this fiscal year, thereby strengthening the country's foreign-exchange reserves further.
"There will be new demand for dollars, but this will not pose a problem once the expected inflows are achieved," the chief of the monetary authority said.
Economists believe maintaining a tight monetary policy is justified given recent inflation trends, despite businesses pushing for a more accommodative posture.
"The Bangladesh Bank cannot afford to take risks while inflation remains high, or nearly 10 per cent," says Dr Zahid Hussain, an independent economist in Bangladesh.
However, he warns that keeping the policy rate at 10 per cent indefinitely is not a sufficient strategy to curb inflation.
"There is a strict ceiling of Tk 122 per USD, which, according to market insiders, is enforced through moral suasion via phone calls and inspections," he told the FE in a written note.
The note further reads: "It is evident that the Bangladesh Bank is afraid to allow the exchange rate to float freely, fearing continuous depreciation if left to market forces."
Dr Hussain warns such depreciation would exacerbate inflation.
He also says restrictions on competitive exchange-rate offerings are hurting the LC market and disrupting international trade.
Meanwhile, Dr M. Masrur Reaz, Chairman and CEO of Policy Exchange Bangladesh, told the FE that the monetary stance is appropriate as there is no room for an expansionary policy.
"There were rumours that the policy rate might be raised further," he said, adding that SMEs are struggling under the 10-percent policy rate as it pushes lending rates higher, over 14 per cent.
On the governor's optimistic export and remittance projections, Dr Masrur agrees that these estimates may be realistic.
However, Dr Mustafa K. Mujeri, Executive Director of the Institute for Inclusive Finance and Development (InM), cautions that elevated policy rates alone cannot control inflation.
"It has never worked in the past. Other contributing factors must be considered," says Dr Mujeri, a former Chief Economist of Bangladesh Bank.
He says while the monetary stance is generally on the right track, policymakers should focus on broader economic factors beyond interest rates.
Monetary Projections (January-June 2025) are as follows:
Broad money growth 8.4 per cent as the central bank expects the economy to rebound soon.
Private-sector credit growth 9.8 per cent while public-sector rate 17.5 per cent.
Reserve money growth 1.0 per cent, as the Bangladesh Bank is not printing money, the MPS says.
Net foreign assets are put at 7.7 per cent and net domestic assets 8.5 per cent by June.

jasimharoon@yahoo.com