The new monetary policy for the first half of the current fiscal year focuses on reining in inflation, keeping the key policy rates unchanged, the central bank said yesterday.
Bangladesh Bank also forecast the country's economic growth will be between 6.2 percent and 6.5 percent in fiscal 2014-15 though the government in the new budget set the target at 7.3 percent. The growth was 6.1 percent in the recently concluded fiscal year.
The inflation rate will be brought down to 6.5 percent from last fiscal year's 7.4 percent, according to the half-yearly Monetary Policy Statement (MPS) announced by BB Governor Atiur Rahman at a press conference at his office in the city.
The government's budgetary target is to cut the inflation rate to 6 percent. "The basic character of the MPS is that it is investment-friendly but the central bank took a cautious stance with a focus on inflation," Rahman said.
The BB also aims to keep the ceiling for private sector credit growth at 14 percent by December this year, against 15 percent in the same month last year. However, the central bank said the ceiling will be 16.5 percent in December once borrowing from foreign sources is included.
“The risks to the inflation target include global food price volatility, any shocks to domestic crop output and the knock-on impacts of any upward adjustments in public sector wages,” Rahman said.
The persisting inflationary pressures over the past few months with the risks ahead related to the inflation outlook imply that achieving the inflation target will be challenging, he said.
Rahman, however, said the central bank will ensure that the credit growth is sufficient to stimulate inclusive economic growth.
In February last year, the central bank for the first time in three years had cut all repo rates by 50 basis points to help commercial banks get money from the central bank at a cheaper rate. The repurchase rate (repo) was lowered to 7.25 percent and reverse repo rate to 5.25 percent. Special repo rate was cut to 10.25 percent.
Hassan Zaman, chief economist of BB, said: “Given the rapid growth in local firms' borrowing from overseas, this monetary policy sets a private sector credit growth ceiling as a sum of both local and overseas borrowing by firms.” “This is a more realistic representation of how much credit is being injected into the economy," he said.
The 16.5 percent ceiling balances the need to allow sufficient credit to meet realistic economic growth targets for fiscal 2015 while also bringing inflation down further, he said.
Zahid Hussain, lead economist at the World Bank's Dhaka office, said the central bank has given a monetary policy compatible with the expected state of the economy.
“It has set monetary growth targets in line with realistic growth and inflation targets. There is adequate space for growth of credit to the private sector and accommodation of the government's bank borrowing target in the fiscal 2015 budget,” he said.
The BB was under pressure from various quarters for a 'cheap money policy', he said. “Such policies brought miseries for small investors and did not help the economy overall in the past.”
He said cheap money policy is counterproductive when financial sector governance is weak and investment and employment are structurally constrained.
“BB deserves to be congratulated for rising above pressures. It has once again signalled very convincingly that the design and implementation of monetary policy is not a popularity contest,” Hussain added.
The MPS said commodity prices and regional inflation continue to pose a key country risk due to a number of factors.
“Escalation of future uncertainties in the Middle East may have a significant impact on oil price volatility,” it said.
Global food prices are expected to remain uncertain as well over the next six months. “There is some correlation between Indian and Bangladeshi inflation. Indian inflation has fallen in recent months, but it remains high and only further significant declines will make a material difference to inflation in Bangladesh,” it said.
To minimise the risks, the MPS said, the central bank will continue to focus on achieving its inflation targets while providing sufficient space in its monetary programme for lending to activities which support broad-based investment and inclusive growth objectives.
“BB will use both monetary and financial sector policy instruments to achieve these goals,” the governor said.
He said the space for private sector credit growth has been kept well in line with output growth targets and is sufficient to accommodate any substantial rise in investment over the next six months.
The BB views these figures as indicative ceilings -- banks continue to be advised to lend only to creditworthy clients for productive purposes, Rahman said.
“At the same time these ceilings are flexible and the monetary programme can be recalibrated should economic growth pick up faster than projected,” he said.
The projected pick-up in economic growth in fiscal 2015 should absorb some of the current excess liquidity though the BB stands ready to use its range of instruments to further limit excess liquidity, he added.
Corporate borrowings from foreign sources having a maturity beyond five years were worth around $2.6 billion in fiscal 2014, while the amount was $2.4 billion in fiscal 2013 and $1.8 billion in fiscal 2012, according to the MPS.
Private capital flows to local companies have also grown due to the addition of short-term foreign currency loans for working capital purposes in the form of 'buyers credit' and 'discounted export bills'.
Buyers' credit in particular has grown sharply to $3.2 billion in April 2014 from about $600 million in the same month last year, the MPS said.
Allah Malik Kazmi, an adviser to the central bank, said foreign borrowing plays a role in increasing competitiveness of local products in overseas markets. “Low-cost funds reduce production costs of local companies, increasing their competitiveness in international markets,” he said.
Kazmi also, said though remittances marked a fall in the first half of the last fiscal year, earnings have begun to pick up from the second half.
"Remittances will have to be raised to increase the overall GDP growth. And for this to happen, the government will have to remove the bottlenecks in manpower export."
BB Deputy Governor SK Sur Chowdhury said big investment opportunities have been created both in rural and urban areas by modernising payment systems. “As a result, investment will increase in the days to come,” he said.
Replying to queries, Chowdhury said no strict policies have been taken that can affect the capital market.
Deputy governors Abul Quasem and Nazneen Sultana, and executive directors Md Ahsan Ullah, M Mahfuzur Rahman and SM Moniruzzaman were also present at the press conference.