BB takes steps to spur investment

The central bank yesterday announced policy rate cuts of 50 basis points as a push to the economy, as Bangladesh strives to achieve 7 percent GDP growth this fiscal year.             

This policy recalibration -- lower policy rate and prudent credit and broad money targets -- can sufficiently accommodate growth without sacrificing the inflation performance, said Atiur Rahman, governor of Bangladesh Bank.

The BB reduced the benchmark repo rate to 6.75 percent from 7.25 percent and the reverse repo rate to 4.75 percent from 5.25 percent in the monetary policy statement (MPS) for the second half of fiscal 2015-16 to realign them with the market rates. The new rates are now the lowest since 2011.

“This is an investment stimulating monetary policy,” the BB said, adding that the falling fuel and commodity prices have globally created a low-inflation environment, paving the way for a considerable reduction in policy rates.

The repo rate is the rate at which the central bank lends to commercial banks. A cut in the repo rate helps the commercial banks get money at a cheaper rate in the event of a fund shortfall.

Conversely, the reverse repo rate is the rate at which Bangladesh Bank borrows funds from commercial banks to control money supply.

The new MPS has set the private sector credit growth target at 14.8 percent, down from 15 percent in the MPS announced last July.

The target is slightly lower than the last MPS target but higher than the actual outcome.

In November last year, the private sector credit growth on a year-on-year basis stood at 13.72 percent.

Rahman said the latest monetary stance is cautious but supportive. “As always, we remain vigilant and ready to adjust our stance as facts on the ground and the outlook on the horizon evolve.”

Since the last MPS in July, prices have remained broadly stable, with average inflation moderating from 6.4 percent in June to 6.2 percent in December and currently within the target.

But December's core inflation -- without food and fuel -- of 6.8 percent reflects some price pressure and, therefore, suggests a need for caution, he said.

The MPS projected that inflation will be 6.1 percent in June, which is lower than the government's budgetary target of 6.2 percent.

Growth in fiscal 2015-16 will be 6.8-6.9 percent, which is slightly less than the government's target of 7 percent.

Bangladesh's projected GDP growth for 2016 will be almost double the world GDP growth and higher than China's, it said.

In other words, global potential growth has slowed.

“What does it mean for our macro-strategy and growth aspirations? The short answer is: for the same level of growth, we will need to row harder.”

However, a recent World Bank study said a one percentage point increase in GDP growth in India contributes to a growth in Bangladesh's GDP by 0.4 percentage points.

India's 7.5 percent growth forecast for 2016 bodes well for Bangladesh: there will be a positive ripple effect through the channels of trade and services.

But providing electricity, gas and infrastructure to businesses should be priorities in ensuring slightly upward growth in a sustained fashion, it added.

In the MPS, the central bank has stressed quality credit disbursement over higher credit growth.

To activate banks in utilising idle liquidity in productive lending to farm and non-farm enterprises, the area heads of BB offices have been advised to engage in field visits with bankers in search for eligible clients still out of financial inclusion initiatives.

To further expand the existing clientele, the BB has also advised all banks to send their officials to explore new lending opportunities that had not been cultivated yet.

“These initiatives will hopefully create more productive credit demand and new employment opportunities in the economy,” the MPS said.

Commercial banks have been motivated and supported in extending loans to the productive and vulnerable sectors at lower interest rates. Green projects will get loans at a lower rate and so will export promotion activities.

The World Bank has committed to contribute $300 million as credit, which will be used for medium to longer term foreign currency financing of manufacturing projects at low costs.

The BB will add another $200 million for green initiatives in the export-oriented textile, apparel and leather sectors.

Thus, the BB has adopted selective easing through judicious variations of interest rates, according to the MPS.

If taken together, the productive sectors are accessing low-cost financing and hence contributing substantially to the supply-side capacity of the economy, it added.