BB throws kitchen sink at downturn with its latest monetary policy

The central bank yesterday took an expansionary monetary policy by way of cutting the interest rate on its tools with the view to making funds cheaper for both banks and businesses.

The latest initiative will, hopefully, go some way towards bringing an economic bounce.

As part of its move to make funds cheaper for banks, it cut the repurchase agreement (repo) rate once again such that banks will get funds smoothly from the Bangladesh Bank.

The repo rate was cut 50 basis points to 4.75 per cent when it unveiled the monetary policy statement (MPS) for fiscal 2020-21.

The latest rate cut, which stood at 6 per cent before the pandemic, will inspire confidence amongst banks and businesses alike, a central bank official said.

In Bangladesh, the repo rate is the central bank policy rate (CBPR), which is the rate that is used to implement or signal the monetary policy stance.

Under the repo programme, the repayment duration of the repo is between one day and 28 days as per the central bank's regulations.

The central bank also cut the reverse repo rate by 75 basis points to 4 per cent and the bank rate by 100 basis points to 4 per cent.

A reverse repo agreement is the purchase of securities with the agreement to sell them at a higher price at a specific date in future. In Bangladesh, banks deposit their money with the central bank at a rate set by the latter.

Bank rate, which is another major tool of the central bank, was cut yesterday after 17 years as part of the expansionary monetary policy. BB, on the whole, uses the rate while giving out money to banks under its refinance scheme.  

The central bank has recently cut cash reserve ratio and credit-deposit ratio in tandem, which has helped banks enjoy a large amount of liquidity to tackle the ongoing economic fallout.

Besides, BB is also injecting funds to the financial sector as part of its effort to implement the stimulus packages.

But businesses continue to show little interest in taking loans from banks, leaving them with excess liquidity.

Asked for the rationale behind the initiative when the money market is flush with liquidity, a BB official, who has strong knowledge on the matter, said banks hardly take any fund from the central bank to make the financial sector vibrant.

"So, the latest initiative is more for optics. It sends out a positive signal," he said.

The latest BB move will play a vital role in increasing both the reserve and broad money supply to the financial sector in the days ahead, said Ahsan H Mansur, executive director of the Policy Research Institute.

Reserve money (RM) or the central bank money represents the base level for money supply or it is the high-powered component of the money supply.

Broad money depends on the volume of reserve money, which is a multiple of reserve money as well.

The growth of RM stood at 15.7 per cent in FY20, up from 5.3 per cent a year ago.

The supply of RM increased significantly last fiscal year as the central bank circulated the currency to the financial sector to mitigate the fallout.

The BB has also set an RM growth target of 13.5 per cent for this fiscal year.

But Mansur said RM might surpass the growth set by the central bank as both the net foreign assets and government borrowing may increase significantly this fiscal year.

The net foreign assets (NFAs) traditionally increase when GDP growth faces crisis as this has harmed the import, he said.

Although banks now enjoy huge liquidity, they will show little interest in investing their fund in the treasury bills and bonds in the days ahead due to the declining trend of the interest rate on the government securities.

Against the backdrop, the central bank will have to provide the funds to the government by using the RM.

The government has set a bank borrowing target of Tk 84,980 crore to meet its deficit financing of the fiscal budget.

The central bank has set a public sector credit growth target of 44 per cent for fiscal 2020-21, up from 53.3 per cent a year earlier.  

Public sector credit growth may be higher than the target set by the central bank as the government continues to show frustrating performance in mobilising revenue, said Zahid Hussain, former lead economist of the World Bank's Dhaka office.

All indicators have given a signal that money supply from the central bank will increase significantly in the days ahead.

The central bank will have to monitor strictly on the financial sector such that the speculative sectors like housing or capital market will not get the excessive fund.

Excessive investment in the speculative sector led the global recession in 2007, said Mansur, also a former high official of the International Monetary Fund.

Ensuring private sector credit growth in the productive sector is the only way to bypass the speculative sectors, he said.

But, the credit growth stood at 8.61 per cent last fiscal year, much lower than the actual target of 14.80 per cent.

The central bank has also kept unchanged the credit growth target for this fiscal year.

The monetary policy statement (MPS) also said 8.20 per cent GDP growth set by the government could be achieved if the stimulus packages are implemented timely.

"The central bank in its MPS stated that the policy had been drawn up to recover the economy. But, we will be much too happy if the country could achieve a positive growth," Hussain said.

The MPS also said that inflation could be contained at 5.5 per cent as per the government's target.

The central bank, however, feared that the expansionary and accommodative monetary policy stance along with the implementation of the various stimulus packages in the economy may intensify the unexpected inflationary pressure through creating a price bubble in the near future.

"Further aggravation in the global recessionary economic condition due to the lingering of the pandemic along with the volatilities in oil price and ongoing geopolitical tensions in the Middle-East might have a serious negative impact on the future exports and remittances," the MPS said.

The central bank also thinks that defaulted loans in the banking sector would increase further in the days ahead.

Although the present default loan scenario of the banking sector has markedly improved, thanks in large part to the recent rescheduling facility, the worsening business condition means the condition might revert to its previous state.

"Banks should use the initiatives taken by the government and the central bank properly in order to use those in the productive sector," said BB Governor Fazle Kabir in a press release.

The economy will face different challenges if the funds are not used properly, he added.