The necessity of a sound monetary policy

Monetary policy is framed with ways of managing the supply of money in an economy. It is the process by which the monetary authority of a country controls the money supply often regulating rates of interest for the purpose of promoting economic growth and stability.
The monetary policy of a country pertains to how central banks around the world deal with their money supply and the performance of economies around the world. The central banks use government securities, interest rates and other tools to influence availability of money in the economy and credit as well. As in the case with any other policy, there is an array of advantages and disadvantages to take into consideration.
Monetary policy helps stabilise prices which is necessary for making sure that the inflation rate stays low. Inflation essentially impacts the way one spends his money and how much his money is worth. With a low inflation rate, it allows him to make the best financial decisions without having to worry about prices drastically increasing unexpectedly.
One of the most serious disadvantages is that the goals that it may have now could possibly impact goals in the future. If the monetary policy positively lowers inflation rates today, it may spark it in the future. With that being said, there are steps to make sure that there is a balance between  long-term and short-term goals.
Every fiscal year, the Bangladesh Bank (BB) announces its monetary policy twice. The monetary policy for first six months of this fiscal year was recently announced by the BB. It is aimed at promoting financial stability with sustainable development of  banking and financial institutions. Announcing the half-yearly (H1) monetary policy for the fiscal year 2015-2016 on July 30 last, BB Governor Dr Atiur Rahman said that the new monetary policy would encourage productive sectors, enhance development and expansion of the financial sectors apart from strengthening the sustainable financing for a sustainable economy and so there would be mid-and long-term systems. The governor further said the monetary policy would help improve the country's economic and financial sectors. He further said the prevailing stability in the overall economy, including inflation and foreign currency rate, should not be disturbed.
After announcement of the monetary policy statement (MPS), economists, bankers and other stakeholders of different private sectors have expressed their views over it. The MPS is aimed at boosting investment and economic growth. At a time when Bangladesh's banking sector has been facing difficulties, how the central bank's monetary policy handles these remains to be seen.
In the MPS, the central bank has targeted a gross domestic product (GDP) growth rate at 7.0 per cent while the inflation target has been set at 6.2 per cent aiming to curb inflation and increase investment. The BB seeks to maintain the inflation rate of the past and it is highly optimistic that the inflation rate will be limited to 6.00 per cent during the six-monthly period.
The BB monetary stance aims to reduce  average inflation down to the target of 6.2 per cent by making sure that there is sufficient credit growth to stimulate inclusive financial and economic growth.
The policy concentrates on financial stability, expanding access to agricultural finance, which is also a part of the monetary policy statement, helping achieve economic growth and control inflation among other things.
The interest rate is going to come down like in the past due to prudential monetary policies adopted in recent years. At this moment, the private sector is hoping for a sharp cut in interest rates.
 In case of agriculture and import- substitute commodities sector, with the help of the monetary policy, the BB reduced interest rates of refinancing to around 5.0 per cent in the past. The BB is providing funds to banks and financial institutions at an annual interest rate of 5.0 per cent and they will have to lend it at a rate the spread of which will not be more than 5.00 per cent. The BB also provides a refinancing facility at a lower rate to priority sectors, particularly its green banking finance.
 The last fiscal year was an impressive one for the Bangladesh economy. Inflation was controlled and there was a sign of financial stability and recovery despite lower economic growth due to political instability. Although GDP increased at only 6.2 per cent, it might be more at 7.2 per cent if the peaceful political situation prevails. This success was achieved mainly due to the government's macroeconomic policies, especially its monetary policy.
The biggest contribution of the monetary policy was to control inflation, while the consumer price index inflation was more than 13 per cent some years ago and gradually it dropped to 6.25 per cent in the fiscal year 2014-2015.  The second success was stabilising the exchange rate between the Bangladeshi taka and foreign currencies while increasing the forex reserve. The third was to cut the interest rate which had been a difficult task for Bangladesh for a long time.
A key achievement of Bangladesh's banking and financial sector for the year was to cut the lending rate, a move that strongly influenced domestic business community and contributed to the national economic recovery. Statistics by the banking sector show that the average annual lending rate is now ten per cent less than the 22 per cent seen three years ago. The decline in interest rates has helped businesses boost their production and trading.
 To implement the newly-announced monetary policy, more attention should be given particularly to adequate supply of credit and investment-friendly interest rates, ensuring investment in productive sectors, particularly in agriculture, and strengthening close supervision and monitoring to focus on quality and effective distribution of credit. The cost of fund, especially bank loans, for all sectors should be lessened to a rational level. Sector-wise loan targets emphasising micro, small and medium enterprises (MSMEs) and women entrepreneurs should be there and the interest rates should be kept at a rational level to give them better opportunities. Cost of doing business should be lessened to help compete globally and encourage banking services to rural areas also. It is mentioned that although there was a target of 15.5 per cent credit flow to the private sector in the last monetary policy, the growth in the flow was only 13.6 per cent till June 2015 .Therefore, it is necessary to ensure infrastructural facilities and loans on easy terms to spur the private sector growth. For that reason, different business-stakeholders have projected that the investment should be minimum 34 per cent of the GDP to achieve 8.0 per cent growth target and make Bangladesh a middle- income country by 2021.
The writer is Assistant General Manager of Bangladesh Krishi Bank. sobhan_bd2003@yahoocom