BB stands guard against inflation

The rising inflation is weighing heavily on the central bank's mind as it unveiled a cautionary monetary policy for the first half of the fiscal year yesterday.

The private sector credit growth target has been set at 16.2 percent, down from the preceding six months' 16.5 percent.

For achieving fiscal 2017-18's budgetary growth target of 7.4 percent, a 16.2 percent private sector credit growth target is enough, said Fazle Kabir, governor of the Bangladesh Bank.

“Our main task is to monitor inflation round-the-clock and give all-out support to growth,” he said.

In the last quarter of fiscal 2016-17, inflation edged up about 44 basis points from the previous quarter to 5.72 percent.

Though the private sector growth target has been lowered slightly, the BB policy rate -- the main instrument for countering inflationary risk -- has been kept unchanged. With the view to balancing growth and inflationary risks  against the backdrop of a subdued global inflation outlook and tightening monetary policy conditions in advanced economies, the BB has decided to keep policy rates unchanged at its current level.

The repo rate would continue to be 6.75 percent and the reverse repo rate 4.75 percent.

Since January, food inflation has been showing an upward trend and non-food inflation too edged up since February.

In the last quarter of fiscal 2016-17, food inflation stood at 7.27 percent, up from 6.74 percent in the previous quarter. A year earlier, it was 3.96 percent. Non-food inflation stood at 3.47 percent during the period, in contrast to 3.12 percent the preceding three months.

The BB's projection shows average annual inflation for the first half of the fiscal 2017-18 would be 5.5 to 5.9 percent. The inflation target set in the budget is 5.5 percent.

The MPS said the BB is cognisant of the inflationary dynamics in Bangladesh, so policy rates will be reviewed on a continuous basis and can be changed promptly if needed.

“The Bangladesh Bank deserves to be congratulated for setting realistic targets and avoiding an expansionary stance,” said Zahid Hussain, lead economist of the World Bank's Dhaka office.

The MPS has maintained policy continuity while incorporating lessons from the fiscal 2016-17 monetary programme performance in setting the program targets for fiscal 2017-18, he said.

“The announced stance is likely to be subject to populist critique, but then monetary policy making is not a popularity contest, as this MPS courageously demonstrates,” Hussain added.

Meanwhile, the BB projected lower GDP growth than the budgetary target due to several risks including declining remittance and low export growth.

The central bank projects the growth this fiscal year to be between 7.1 and 7.4 percent. However, the forecast assumes continued political calmness.

Hussain said there is pressure on the exchange rate to depreciate given the huge turnaround in the current account balance during the course of last fiscal year.

In the first 11 months of fiscal 2016-17, the current account balance went into deficit of more than $2 billion from over $3 billion surplus a year earlier.

“BB has done well by allowing the market forces to work their way through a creeping depreciation of the taka-dollar rate. This is appropriate, particularly given the feeble export growth and a precipitous decline in remittances,” he added.