Savings tools\\\' rate cut defies rationale

The central bank of the country is virtually seeking the ultimate authority to set yield rates of the government savings tools. The rationale behind such a move is, apparently, to ensure stronger supervision of the financial market and contain inflation.
The government has announced reduction of different savings tools up to two percentage points, apparently counting on the central bank's suggestion. According to the central bank, average bank lending rate declined to 11.93 per cent in March this year from 13.73 per cent two years ago.  At the same time, the average deposit rate declined to 7.06 per cent from 8.67 per cent. Thus the difference between deposit and lending rates came down to 4.87 percentage points.
It is true that sales of savings certificates have increased significantly. The sales rose by 77.2 per cent in July-February period of the current fiscal (FY'15) over the same period of the previous fiscal. Before the cut, the average yield rate of the savings certificates was 13 per cent while banks' deposit rate was well below 10 per cent. Such higher rate also pulled out funds from the stock market, claimed the chief economist of the central bank.
Now, a volatile stock market cannot be made vibrant and lucrative by lowering yield rates of savings certificates and interest rate on bank deposits.  It is also not a wise idea to ask people to invest in the stock market by withdrawing their deposits from banks. At least, a central bank cannot move ahead with such a naïve suggestion.
The more important questions are: how does higher yield rate of savings instruments discourage investment? Does the central bank have any study in this matter? What is the guarantee that the rate cut would stimulate investment? Answers to these questions are yet to be known.
Investment in any savings certificate, be it pensioner's savings certificate or family savings certificate, has to be examined thoroughly to understand how it benefits society at large. By lowering yield rates of these instruments, the government has actually attempted to depress consumption. Ordinary people, women and retired persons dependent on regular returns from savings instruments, have to reduce their consumption. This will subsequently shrink demand.
In Bangladesh, monetary policy has little impact on inflation. Price spiralling of food items, particularly of rice, plays the lead role in influencing inflation. Another is the price situation of goods and services in international market. Recently, a gradual fall in prices of imports including fuel price has rendered domestic prices stable to some extent. There are so many other variables which influence market prices. But monetary efforts have little space here.
Balancing the money market is a must, but not be at the cost of hurting savings, squeezing demands, making citizens vulnerable to liquidity trap.
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