Meeting monetary policy objectives

THE monetary policy is always important for any economy, big or small. Its importance goes a few notches up when an economy faces trouble from within or outside or both. The current global economic recession of an unprecedented nature makes the task of any central bank of developing countries like Bangladesh even more difficult. In recent years, the Bangladesh Bank has sought to maintain adequate credit growth to support sustained real GDP growth and keep inflation within the targeted levels while making necessary adjustments to situations emanating from domestic and external shocks. However, in the face of high inflationary pressure, on occasions in the recent past, it had opted for some brief spells of contractionary monetary policy, restricting marginally the credit flow to the private sector.
The central bank under a new governor last Sunday announced its half-yearly monetary policy that is claimed to be 'accommodative as well as pro-active' and designed to support the efforts for achieving the maximum sustainable output growth without provoking inflation. The new policy comes, according to the governor, in the backdrop of a sluggish investment environment and slowdown in export, as consequences of the global economic downturn and uptrend in inflation noted lately. The central bank, for obvious reasons, has formulated the policy keeping in view both the worse case and optimistic scenarios. If the ongoing global crisis deepens, the economic woes of the country are likely to multiply in the event of further declaration of export growth rate and remittance incomes.
The central bank has considered it prudent to keep the issues of investment growth, which has been rather sluggish for more than two years, at the center of the new monetary policy. Looking at the uncertain prospect of export growth, the monetary policy has been made rather inward looking as far as investment is concerned. It puts greater emphasis on the flow of funds to the real sectors such as agriculture and small and medium enterprises (SMEs) that hitherto have received unfair treatment despite all the official exhortations. The higher growth in these areas is all the more necessary to help generate demand in the economy and create enough employment opportunities in the face of weak demand situation in the external sector.
There should be no problem in meeting the demand for resources from the private sector investors since the banks are now, literally, awash with liquidity and the lending rates have also been brought down under pressure from the central bank. However, the central bank government on the occasion of unveiling of the monetary policy made his desire amply clear that he wants further lowering of banks' interest rates, fees and charges, which are high compared to those in many other countries. But any mandatory cut in lending rates runs counter to deregulation of financial market. The longing for lower lending rates on the part of the governor is understandable, particularly in a depressed investment situation. However, one cannot ignore the issue of banks' cost of fund. There could be some limited scope for cutting some other costs by banks, but reduction in deposit rates, which would be an obvious outcome in the event of further cut in lending rates, will not be feasible. Moreover, the question of lowering the interest rates of competing saving instruments, for logical reasons, cannot be ignored. Besides, it is not the lending at lower rate alone that encourages an entrepreneur to make a positive investment decision. Some other factors that cannot be addressed by the monetary policy tool do also play an important role in shaping the same. So, government policies and actions must be in sync with the objectives of the central bank's monetary policy that prioritizes investment.