BB set to rein in excess money supply

The Bangladesh Bank yesterday decided to mop up excess liquidity as it is hurting banks, savers and small borrowers and threatening to create instability in the economy through asset bubbles.

Under the intervention, the central bank will revive the BB Bill, an instrument that was last used in March 2018, to allow lenders to invest idle funds.

Bankers welcomed the central bank move, saying it would help reduce the excess cash effectively.

The initiative will also give a breathing space to depositors whose incomes have been pummeled by the lack of an expected rate on investment owing to a negative return on savings.

The programme will hardly send the lending rate higher, given a large amount of excess liquidity available in the banking system.

The first auction of the "Bangladesh Bank Bill" will be held on August 9. A total of 9 auctions will be organised throughout this month.

 The BB has written to all banks and non-bank financial institutions, saying that the initiative would help control the excess liquidity.

"This will also keep the money market stable as well," it said.

The excess liquidity in the banking system stood at Tk 231,462 crore as of June, up 66 per cent year-on-year and 9 per cent a month ago.

The surplus fund has been maintaining an upward trend since March last year after the central bank took several measures to inject money into the market to offset the business slowdown brought on by the coronavirus pandemic.

However, the move has not been able to revive the private sector credit growth as the pandemic is yet to be brought under control.

The private sector credit growth stood at 8.40 per cent last fiscal year against the central bank target of 14.80 per cent. Against the backdrop, a massive injection of capital into the market has made money cheaper than ever, bringing down the interest rate on deposits.

A BB official said that the central bank had taken the initiative as part of its latest monetary policy stance, which indicated withdrawing surplus funds in phases.

The central bank unveiled an "expansionary and accommodative" monetary policy on July 29, aiming to keep funds available for the productive sector and curb its flow to the unproductive sectors such as the stock market and the housing sector.

Withdrawing excess cash will also help the central bank contain inflation. It has failed to keep inflation within the target in the last fiscal year.

The central bank usually mops up money using three instruments: the BB Bill, the reverse repo (repurchase agreement), and the cash reserve ratio (CRR).

There are three categories of the BB Bill based on their maturity: 7-day, 14-day and 30-day. The BB will arrange auctions for the three types of the Bill.

Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, said: "This is a time-befitting move as some banks are eagerly waiting for this."

The interest rate on the BB Bill ranged from 2.97 to 2.98 per cent in March 2018 when the central bank held the last auctions.

However, the interest rate may become an important factor as the existing rate of the 91-day Treasury bill is 0.55 per cent, Ahmed said.

The rate of the BB Bill is usually slightly higher than the 91-day T-bill, an instrument through which the government borrows money from the banking sector.

Although the rate is determined by auctions, the central bank has a strong role in pushing the rate higher.

If the central bank accepts a substantiate number of bids, the yield on the instrument will increase automatically, Ahmed said.

"This will encourage many banks to take part in the auctions," he said.

He also suggested the central bank reopen the reverse repo, which has remained suspended since November 2015.

The reverse repo rate is a rate at which a central bank borrows funds from banks to squeeze money supply in the market.

BB officials say the rate on the reverse repo is very high compared to the rates on the deposit products offered by banks.

The reverse repo window will allow banks to invest funds at 4 per cent at the central bank on an overnight basis.

Many banks now offer interest rates between 2 and 3 per cent on their fixed deposit receipts (FDRs). So, reopening the reverse repo is not viable at this moment, said a central banker.

But, Jamuna Bank's Ahmed said that the central bank should reopen the window by bringing down the interest rate to around 2 per cent.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, echoed Ahmed, saying the BB could consider reopening reverse repo.

Appreciating the central bank move, he said banks would show more interest in investing in the BB Bill if they gained a considerable interest rate.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the central bank should mop up at least Tk 33,000 crore immediately in order to make the money market stable.

Withdrawing the excess liquidity will not create any barrier for the BB to implement the expansionary monetary policy, he said.

Small savers will benefit from the programme as the interest rate on deposits will increase in keeping with the reduction of the excess liquidity, said Mansur, also a former official of the International Monetary Policy.

The withdrawal of funds will not have any adverse impact on the lending rate as such a big volume of extra money is not required to materialise the expansionary monetary policy, he said.

"Still, the central bank should cautiously watch the money market so that banks cannot manipulate the lending rate on the excuse of the withdrawal of excess fund."

"We have to keep in mind that the surplus fund is being invested in the capital market, where a bubble has already been created. Such bubble has to be contained at any cost or else it will create instability in some certain areas of the macroeconomy."