Savers on the receiving end again

The Bangladesh Bank has decided to withdraw the interest rate floor on retail term deposits which had been set by banks equivalent to the average inflation rate of the immediate past three months, said bankers.

The central bank verbally informed the Association of Bankers, Bangladesh, a platform for managing directors of banks, of the decision two weeks earlier.

Contacted, an official of the central bank, said the BB has taken the decision following the method of the free market economy.

The central bank, however, has not sent out any circular yet to this end. If required, the BB will issue a circular to this end, said the official.

GM Abul Kalam Azad, the spokesperson of the BB, declined to comment on it.

In August last year, the BB asked banks not to set interest rates on fixed-term deposits below the inflation rate as it yields negative returns for savers.

Banks had been asked to set the interest rate on retail fixed deposits considering the inflation rates of the immediate past three months in order to protect the interests of depositors.

But the latest decision of the central bank will hand a blow to depositors, who will be getting rates from banks below the inflation rate even though inflation has been rising in recent periods.

Inflation in Bangladesh surged to a 10-year high of 9.52 per cent in August. It fell to 9.10 per cent in September, showed data from the Bangladesh Bureau of Statistics.

It is unlikely that inflation will come down significantly anytime soon since the factors -- the war, higher commodity prices, the surge in energy prices, and supply disruption – that have sent the consumer prices higher in the first place are already there. 

The weighted average rate of deposits -- which is calculated based on the interest rates of all types of deposits offered by banks -- stood at 4.07 per cent in August.

This means the real interest rate was 5.45 per cent in the negative in August.

If banks now set the interest rate on fixed deposits considering the inflation rate, the central bank will have to withdraw the interest rate cap of 9 per cent on lending, another BB official.

"This is why the central bank has asked banks not to follow its previous instruction," he said.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the BB should take measures to encourage depositors such that they park their funds with banks.

"A good number of people are now investing their funds in the real estate sector since they are not getting interest rates they desire from banks."

For this reason, a majority of banks are now facing liquidity stress.

Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, said the central bank should issue a circular to ensure transparency to this end.