BB moves to mop up liquidity
Bangladesh Bank (BB) has moved to resume reverse repo operations after a brief lull -- to take excess liquidity off the banking sector -- but cut its interest rate by 4 percentage points.
After remaining quiet on the matter for about seven months, the central bank announced the new plans.
The banking sector is currently witnessing a liquidity glut of about Tk 38,000 crore, up from nearly Tk 35,000 crore in June.
From today, BB will offer a 2.5 percent interest rate for reverse repo, down from 6.5 percent in March.
BB officials said the reverse repo operations will encourage banks to take part in auctions as the reduced rate is still higher than the present call money rate, now hovering around 1 percent amid droopy demand for money.
BB that aims to pin inflation at 6.5 percent for fiscal 2009-10, reduced the interest rate on a lending instrument -- repo -- by 4 percentage points to 4.5 percent -- keeping a door open for the banks to seek loans in times of need.
BB has moved to resume short-term money market instrument operations, as monthly inflation edged up.
In July, point-to-point inflation rose to 3.46 percent from 2.25 percent a month ago.
Officials, referring to excess liquidity in the banks, said some banks are extending consumers credit because of poor demand for loans in the productive sector.
“It may cause a rise in inflation due to a rise in demand,” a BB official said.
Referring to the present call money rate, he said as demand for money in the banking sector remains low, “it will encourage banks to lend money to the central bank at a rate of 2.5 percent interest".
“But if commercial banks need money in the short term, they will be able to borrow from the central bank.”