Bangladesh Bank has made funds cheaper for all banks by reducing its repo rate by 75 basis points to 6 percent.
The decision was made yesterday, a couple of days after the BB slashed the cash reserve requirement or CRR by one percentage point to 5.5 percent.
But both the decisions will take effect on April 15, according to two circulars issued by the central bank yesterday.
The BB, however, kept the reverse repo rate unchanged at 4.75 percent.
Repo is a short-term fund that the central bank gives to commercial banks in case of cash shortfall, while reverse repo is excess money that banks keep with the central bank.
The BB has already faced severe criticism from different quarters over its decision to cut the CRR. The decision came on Sunday after Finance Minister AMA Muhith held a meeting with BB Governor Fazle Kabir and directors of private banks.
A number of experts told this newspaper yesterday that the BB decisions go against the monetary policy and may hurt the depositors' interest. This will push up money supply in the market and may subsequently increase defaulted loans further.
The BB circular on the CRR said that on average, banks will have to keep with the BB 5.5 percent of their clients' deposits on bi-weekly basis and 5 percent on daily basis.
Talking to The Daily Star, AB Mirza Azizul Islam, former finance adviser to a caretaker government, said the decisions to cut the CRR and the repo rate were made on political consideration to facilitate some cash-strapped banks.
The moves will make funds cheaper for banks. And the excess money supply will increase defaulted loans further as many banks frequently breach the rules and regulations while sanctioning loans, he pointed out.
Such practice has already eroded the depositors' confidence in the banking sector, and the latest decisions contradict the tightened monetary policy taken up by the central bank just two months ago, said Mirza.
With an aim to tighten the money supply, the BB in its monetary policy in January set the private sector credit growth target at 16.8 percent against a previous projection of 16.3 percent for January-June, he said.
But the policy will not be effective because of the latest decisions that came amid pressure from directors of banks, he added.
Ahsan H Mansur, executive director of Policy Research Institute, said the country's current account deficit has recently surpassed $5 billion, and this needs to be addressed immediately.
This deficit problem can be solved through tightened monetary policy and cautious fiscal policy. But the latest move will aggravate this problem, he said.
The government has just bowed down to the irrational demands from directors of private banks, added Ahsan.