In an unprecedented move, the central bank yesterday said it will buy Treasury bills and bonds from banks and non-bank financial institutions (NBFIs) to tackle the impending economic slowdown brought on by the coronavirus pandemic.
The government securities from the secondary bond market will be purchased such that liquidity management of banks and NBFIs will not face any impediment due to the coronavirus pandemic, according to a central bank notice.
The central bank will purchase the securities on the market rate, which will be determined by auction.
The interest rate on the government securities was between 7.10 per cent and 9.10 per cent as per the immediate auctions.
The decision has come after the Reserve Bank of India had declared to buy bonds on the open market for a total of Rs 100 billion ($1.35 billion) to protect its economy from the ongoing crisis arriving from the novel coronavirus outbreak.
The central bank rarely purchases T-bills and bonds from banks.
"This is the first time that the central bank has issued such a notice formally. We had to change seeing the market is facing severe liquidity crunch," said a Bangladesh Bank official.
Banks will be allowed to sell their T-bills and bonds after holding their statutory liquidity ratio (SLR).
Lender hold the majority of the excess liquidity in the form T-bills and bonds. Excess liquidity in the banking sector stood at Tk 105,646 crore as of December last year, according to data from the central bank.
Experts welcomed the quantitative easing programme, saying it will give a lifeline to the local industries as banks will be able to inject funds easily.
Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term government securities or other types of securities from the open market in order to increase the money supply and encourage lending and investment.
Buying the securities adds new money to the economy, and also serves to lower the interest rates by bidding up fixed-income securities.
But experts said the central bank should have fixed a selling amount of bills and bonds, which central banks of other countries have already done so.
"This is a good decision beyond doubt. But the central bank should have mentioned it in its notice how much bills and securities it would purchase," said Ahsan H Mansur, executive director of the Policy Research Institute.
The central bank should purchase government securities worth Tk 25,000 crore such that lenders can supply the required cash to the private sector, which have been hit hard by the ongoing financial crisis.
The BB should immediately cut the policy or repurchase agreement rate (Repo) with a view to keeping the economy afloat.
Md Serajul Islam, spokesperson of the BB, told The Daily Star on Saturday that the central bank was now working on the issue and take a positive decision would be taken in the quickest possible time.
Another central bank office said the monetary policy committee of the BB will discuss the topic today.
Mansur said that repo rate should be cut at least two percentage points from the existing 6 per cent.
The central bank can increase the Repo rate when the situation becomes normal, he added.
Salehuddin Ahmed, a former central bank governor, echoed the same as Mansur.
"The central bank should form a good number of fresh refinancing schemes. Ant it should cut the interest rate of refinancing scheme, which is now 5 per cent," he added.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, expressed gratitude to the central bank, saying it would have a positive impact on the money market.
He went on to urge the BB to cut the interest rate on refinance scheme as banks had counted 5 per cent interest rate on the schemes when the lending rate was 12-13 per cent.
Under the refinance scheme, the central bank provides fund to banks and NBFIs at 5 per cent interest, after which lenders give out loans to borrowers imposing an additional interest of 4-5 per cent.
The central bank earlier formed a number of refinance schemes to help manufactures and women entrepreneurs.
The BB should cut the interest rate on its refinance schemes by 2-3 per cent given the gravity of the situation, said Rahman, also the immediate past chairman of Association of Bankers, Bangladesh, a forum of managing directors.
He echoed the same as Mansur, saying policy rate should be cut at least two percentage points.