Businesses feel unease and inflation frowns while some liquidity-squeezing moves have been in place for months.
The central bank, however, claims its contractionary monetary policy still looks accommodative in current context.
Officials and money-market analysts say the monetary policy is contractionary in terms of value due to higher policy rate but it is very much accommodative as far as the volume is concerned.
Apart from the regular liquidity-feeding instruments of the Bangladesh Bank (BB), the flow of subsidised credits or money injection through irregular arrangements keep rising on the market, which is contradictory to the spirit of contractionary monetary-policy stance taken for holding inflation in check.
As a matter of fact, the BB-guided tight monetary policy is not transmitting into the money market properly and not being able to contain the inflationary pressure at the expected level, which ultimately hurts common people through curtailing their purchasing power.
After the changeover in state power following the 2024 July-August mass uprising that toppled the Sheikh Hasina government, eminent economist Dr Ahsan H. Mansur took the central bank leadership and enhanced policy rate in quick successions by 150 basis points to 10 per cent from 8.50 per cent on October 22, 2024 to contain higher inflationary pressure as part of contractionary monetary policy.
The banking regulator still continues on the policy stance despite criticism from the business circles as the rate of inflation has yet to be brought down to the targeted level of 7.0 per cent.
Contractionary monetary policy is a central bank strategy to slow down an overheating economy and fight high inflation by reducing the money supply, thus making borrowing more expensive, and decreasing overall spending and investment.
But the reality here is different: the volume of quasi-fiscal activities by the BB through which commercial banks avail credits from the regulator at subsidised rates, ranging from 0.5 per cent to 5.0 per cent, is still quite large.
On the other hand, regular government borrowing from the central bank through using ways and means (maximum Tk 120 billion) and overdraft (maximum Tk 120 billion) goes on to operate some 119 accounts at 8.0 per cent and 9.0 per cent respectively, which is against the tight monetary policy stance.
Simultaneously, the central bank keeps injecting high-powered money in the form of assured repo (AR) against special bonds meant for settling accumulated arrears to independent power producers and fertiliser suppliers since February in 2024. Each month, the BB has provided AR facility worth over Tk 50 billion.
As such, the money supply to the market continues rising in recent months. According to the data of the BB, the volume of total money supply was Tk 21.68 trillion by end of July 2025 and the growth was 6.99 per cent from the corresponding period of last year.
Since then, an upturn has been observed in both volume and growth with the money supply rising to Tk 21.82 trillion (7.78-percent growth) and Tk 21.90 trillion (8.14-percent growth) last August and September respectively.
Former executive director (grade-1) of the Bangladesh Bank Dr Md. Ezazul Islam, who was leading the monetary policy department before his very recent joining Bangladesh Institute of Bank Management (BIBM) as its director-general, says there are two criteria through which monetary-policy stance can be judged whether it is contractionary or expansionary. One is quantity and another is price.
He says the central bank has long been pursuing monetary targeting for maintaining price stability but it did not work properly because of various factors, including instability in money demand and dominance of the fiscal policy.
"That's why the banking regulator switched to interest-rate targeting in place of monetary targeting in FY'24. Under this strategy, we raised the cost of funds to control the inflation," he told The Financial Express.
Since January last, the central banker mentions, the policy rate has become tight in real terms as the rate of inflation has been staying below the policy or repo rate.
Seeking anonymity, another BB official says the BB took some liquidity-squeezing steps to contain inflation by limiting the repo-backed borrowing facility to once a week from daily operations. The regulator also scrapped assured liquidity support (ALS) to limit money flow.
"Despite the fact, the monetary policy is still accommodative due to growing fund flow through quasi-fiscal operations, government increased bank borrowing and other arrangements," the official told the FE about the balancing tricks.
The central banker mentions that the volume of quasi-fiscal activities through which banks avail funds at subsidised rates through refinancing schemes to support sectors like SMEs and agriculture stood at over Tk 330 billion.
On the other hand, the government recently revised its bank borrowing target to Tk 1.17 trillion from the initial target of Tk 1.04 trillion in the national budget for FY'26.
Assured repo or AR is another factor that is very contradictory to the spirit of tight monetary policy because the BB keeps injecting inflation-fueling high-powered money into the commercial banks for settling accumulated arrears to independent power producers and fertiliser suppliers, according to him.
The accumulated volume of AR-backed money rose to over Tk 550 billion now.
According to the data on reserve money, the growth of high-powered money had been positive since the policy rate was revised upward in October 2024 until September 2025 apart from last June's count (-0.11 per cent).
In fact, double-digit growth in reserve money was observed in three months (November, March and May last). It is another factor that indicates the monetary policy is still accommodative.
The current movement of the yield curve is another indication of the accommodative monetary policy because the yield on government securities normally goes up due to low fund supply in a tight monetary regime. But in Bangladesh, the yield is not moving up.
Professor of Economics at Independent University Bangladesh M. A. Taslim explains that as the money supply keeps increasing on the market in recent months, the monetary policy seems to be an accommodative one, not contractionary in nature.
The economist notes that the banking regulator has been continuing 'tight monetary policy stance' for months to contain higher inflationary burden. Despite the fact, the rate of inflation has yet to be brought down to the level expected.
On the other hand, the pressure from the business circles to cut down policy rate continues mounting to accelerate economic growth from prolonged sluggishness as the rate of poverty is on the upturn.
"If BB relaxes policy rate considering the economic growth, the inflation will not come down. I think BB is in double whammy. The situation is really tough," he says about a double bind the regulator is in.
According to the data with Bangladesh Bureau of Statistics (BBS), headline inflation reached 8.49 per cent in just-passed December, up from 8.29 per cent in November and October's count of 8.17 per cent.
Founding Chairman of Policy Exchange Bangladesh Dr M Masrur Reaz says the central bank keeps the value tight but continues pumping in large amounts of money through various instruments on the other hand.
"It (monetary policy) is contractionary in terms of price but very much accommodative in regards to quantity," he says.
The economist mentions that there is a revenue shortfall of Tk 240 billion in the first five months of this fiscal year (FY'26). So, it is assumed that the figure could cross Tk 500 billion by the end of the fiscal year.
As there is no sign that the revenue mobilisation would increase significantly under the current macroeconomic context, he predicts, the government will have no other option as it discourages budgetary supports from development partners but to rely on domestic bank borrowing.
"It means the money supply is expected to be increasing further in the coming days."
Former lead economist of World Bank's Dhaka office Dr Zahid Hussain finds quantitative easing in the monetary policy as the balance sheet of BB is expanded despite record rise in policy rate.
He mentions positive growth in the movements of reserve money through which the regulator injects high-powered money to the market amid higher policy-rate regime.
"Some months it is increasing, some months it is dropping, but the positive growth continues. As far as volume is concerned, the monetary policy is still accommodative," he concludes.
Contacted, BB deputy governor Dr Md. Habibur Rahman, the lead author of the Monetary Policy Statement (MPS), said the yield curve typically shifts upward in a tight monetary-policy regime. But the situation is completely different in Bangladesh. "It means the monetary policy is not tight enough," he added.
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