Policy rates to rise, bank lending caps go

A more 'cautious' monetary policy statement (MPS) is likely to be announced today (Sunday), introducing three major regulatory stances believed to be pressure-easing panacea for the under-stress money market and overheated consumer prices.
Official sources said the MPS the Bangladesh Bank (BB) is set to announce is broadly focused on balancing the aforesaid domestic goals with the IMF-offered to-do list on reforms.
Sources at the BB said the central bank is likely to continue the existing tightening in MPS for an extended period to control the grip on mounting inflation that has already surpassed the annual target, hitting hard the lower-and middle-income segments of society.
As part of the squeezing MPS under the changed macroeconomic situation, both globally and domestically, following  the Russia-Ukraine war, there is a high possibility of further enhancing the policy rates -- REPO and Reverse REPO -- in the monetary policy for first half (July-December) of the coming fiscal (FY'24), according to the sources.
This MPS is being touted as different than others as there will be clear indication on some "new but key issues that never happened in Bangladesh".
Seeking anonymity, a BB official said the central bank will share three important decisions: officially introducing interest-rate-policy corridor under the monetary policy-modernisation-policy framework, the phasing out of the existing lending-rate ceiling and calculation of forex reserves as per the IMF's Balance of Payments and International Investment Position Manual (BPM6).
With the new MPS taking effect, the official, said the existing lending-rate cap will be gone and the BB will set a market-based reference rate for banks to fix the lending rates based on the referral.
"The benchmark rate will be made based on six-month moving average of risk-free investment in sovereign instruments like treasury bills and the banks can add maximum three percentage points with the rate in fixing lending rate," the central banker said.
Currently, the six- month moving average of 182-day treasury bills, up to May, is 7.17 per cent, according to BB data.
Also, the central bank will release net reserves data based on the calculation formula of 6th version of the BPM alongside the traditional practice of releasing gross one, the official said.
Another BB official, preferring anonymity, says the BB plans to introduce interest-rate corridor (IRC) under the monetary-policy-modernisation framework suiting an IMF condition to be executed from the next fiscal year prior to getting second tranche of its US$ 4.7-billion loan granted to help stabilise the country's volatile foreign-exchange market under a domino effect of global financial upheavals.
In fact, the interest-rate corridor is minimum and maximum interest-rate ceilings through which the banks can borrow funds from the banking system.
"Interest rate can fluctuate in short term that can have a detrimental effect on investors and depositors. So, the corridor plays an important role in keeping a balance," the BB official said.
Citing example of Reserve Bank of India's IRC model, the official said interest-rate corridor refers to the window between marginal standing facility (MSF) like the special repo and standing deposit facility (SDF) like the reverse repo wherein SDF rate acts as a floor and the MSF rate as the ceiling.
Ideally, rates on the overnight interbank call-money market, where lending and borrowing are insecure, should move within this corridor for checks and balances in trading in money.
Currently, the SDF rate is 6.25 per cent while the MSF is 6.75 per cent and the repo rate 6.50 per cent. And the difference among the rates is 0.50 basis points in India.
But the situation is quite different in Bangladesh -- there is a much wider difference within the rates (reverse repo 4.50 per cent, repo 6.0 per cent and special repo 9.0 per cent).
"Yes, the difference among the rates is quite high: 4.5 percentage points. We'll probably narrow down the difference a bit, but it will be wider than that of India," the official says about trimming the margins cautiously.
Regarding the broad money or M2 growth, the BB sources said the M2 growth set a lower target compared to previous target without hampering private- sector credit growth. In the current MPS that expires this month, the M2 growth target is 11.5 per cent. On the other hand, the credit- growth target for the public sector is set to be a little bit higher in the coming MPS. The target is now 37.7 per cent in the MPS for January-June period, according to the sources.
Regulating money flow in the economy is one means of controlling inflation. Another tool being applied in different countries to tame wild consumer price index (CPI) inflation is application of anti-trust law to clear way for competition.
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