BB stays alert amid emerging risks

The cagey monetary policy of the first half of fiscal 2016-17 will continue in the second half of the year despite buoyancy in the economy in the light of emerging risks of a stockmarket bubble and rising inflation.

The private sector credit growth target will remain the same at 16.5 percent, and so will repo and reverse repo rates, both of which are used to control inflation, at 6.75 percent and 4.75 percent respectively.

"We have kept unchanged the supportive monetary policy stance of the first half of the fiscal year for the second half," Governor Fazle Kabir said yesterday while unveiling the new monetary policy statement or MPS.

Several indicators point to robust economic activity in the first half of fiscal 2016-17, aided by macroeconomic and political stability, and strong domestic demand, Bangladesh Bank said.

Private credit growth, which stands at around 15-16 percent, is on a three-year high. Medium and large-scale manufacturing industry also grew robustly.

Export growth moderated but has held up relatively well (4.4 percent in December 2016) when compared to peers and is expected to pick up.

"This trend indicates that the GDP growth is on the path to its reaching its budgetary target," Kabir said. It will cross the target if the global and domestic conditions remain favourable, he said, citing analysts.

The government has targeted 7.2 percent economic growth for fiscal 2016-17.

The BB also forecasted that inflation will remain in the range of 5.3 percent to 5.6 percent, whereas the budgetary target is 5.8 percent.

However, the average core inflation (non-food, non-fuel), a traditional measure of underlying long-term inflation remains elevated at about 7.6 percent, the MPS said.

"This indicates inflation can pick up if buffeted by adverse shocks," it added.

Besides, global inflation is on an upward trajectory, according to the latest projections of the International Monetary Fund and the World Bank.

Commodity prices are expected to rise in 2017 and the oil prices more than 20 percent. Non-energy prices are also projected to go up.

"Looking ahead, the global commodity outlook suggests some upward price pressures may emerge from higher import prices," the MPS said.

The upward trends of banks' default loans and the stockmarket have been identified as possible risks to the economy as well.

Given the pickup in credit growth, BB's supervisory vigilance on lending efficiency and risk management in the financial sector will continue to be strengthened, with particular emphasis on transparent, accountable corporate governance and substantial reduction in loan defaults, according to the MPS.

While the recent capital market buoyancy may reflect a recovery from its prior depressed state since 2011, caution is warranted in ensuring that exuberance remains rational, Kabir said.

"Otherwise there will be a risk of profit-seeking small investors getting hit badly like last time."

The buoyancy in activities across the economy is somewhat softened by the decline in remittance, according to the MPS.

Remittance slumped 17.63 percent year-on-year to $6.17 billion in the first half of the fiscal year.

The central bank has taken a number of measures -- from immediate to short-term -- to assess and identify the reasons for the falling inward remittances through the banking channel, Kabir said.

In the short-term, the BB has taken up a research to find out the reasons behind the slide in remittance. The findings will be available in a month's time.

The research team will visit Saudi Arabia, UAE and some other Southeast Asian nations where Bangladeshi expatriates live, Kabir said.

On immediate measures, the governor said Bangladeshi embassies and high commissions in remittance-prone countries have been alerted so that unscrupulous quarters cannot remit money through illegal channel like hundi.

"We are also assessing whether banks are charging higher commission for channeling inward remittance."

BB Deputy Governors SK Sur Chowdhury and SM Moniruzzaman, Senior Economic Adviser Faisal Ahmed and Economic Adviser Md Akhtaruzzaman replied to reporters' queries at the session.