Interest on bank loans rises to 10.7pc

Interest on bank loans rises to 10.7 per cent as the central bank now approves lending-rate hike by 50 basis points as part of belt-tightening for reining in unruly inflation.
The latest step that makes funds costlier comes a day after the regulator raised policy rate by 75 basis points to 7.25 per cent with a vow to bridle down the near-double-digit rate of inflation below 8.0 per cent by this yearend.
Bangladesh Bank, the central bank, Thursday raised the loan/investment interest margin by 50 basis points to 3.5 per cent in order to quell inflation that has been hitting hard limited-income group of people for recent months.
The margin will also to spike by 50 basis points to 2.5 per cent for pre-shipment credits and rural as well as agricultural loans. Earlier, banks could charge a maximum of 3.0 per cent upon SMART rate -- a benchmark based on the treasury yields -- from July of this fiscal year.
This means banks can now charge a maximum of 3.5 per cent over SMART rate which will make the borrowing expensive.
For example, if the current month's (October) SMART or benchmark rate is 7.2 per cent, then by adding an additional 3.5 per cent the lending rate will stand at a maximum of 10.7 per cent.
Central bankers familiar with the developments told the FE that such a rate hike would work fast to contain inflation.
"We raised the policy rate by 75 basis points on Wednesday, but it works slowly as it goes through many transmissions to contain the inflation," he said about a staggered inflation-cooling effect of the monetary measure. "But interest-rate hike on lending works very fast," the senior central banker observed.
He explains that this remains maximum ceiling of lending rate and anyone can even charge lower depending on the bank-customer relationship.
When rate of interest on lending increases, the money supply falls. And when the money supply shrinks, the inflation risk gets reduced.
The central bank used the tool as their primary instrument to intervene in the market. Economists welcome this measure to contain the splurge of money as a step in right direction.
"This is a step in the right direction," says Dr Zahid Hussain, an independent economist in Bangladesh. It allows greater flexibility in bank lending-rate determination and for passing through the policy-rate increases.
"This may help prevent build-up in demand pressures that exacerbate inflation."
But expecting inflation to decrease because of this may be a bit of a stretch. The economist cites the theory that says as demand is reduced, prices should come down to encourage competition for the reduced level of demand.
He also said falling prices might sound like good news, especially in the context of the ongoing high cost of living in both urban and rural areas. Inflation, which actually represents an average price surge in an economy, stood at 9.63 per cent at the national level in September.
But interest-rate hikes from central banks worldwide have also triggered fears of poor investment, job losses and economic slowdown.
Despite these risks, higher inflation can be even more damaging, according to Dr M. Marur Reaz, chairman of the Policy Exchange of Bangladesh
"Inflation does far more damage to far more people than higher interest rates do."
He notes that inflation hurts the value of everyone's money by reducing its purchasing power.

jasimharoon@yahoo.com