BB to follow expansionary monetary policy
Bangladesh Bank yesterday announced that it would continue to follow the expansionary monetary policy ignoring the International Monetary Fund's (IMF) suggestion to tight it, to tame the surging inflationary pressures.
“If the policy is tightened at the moment, the pace of the economic activities may be hampered,” Bangladesh Bank (BB) governor Dr Salehuddin Ahmed told newsmen during announcing the monetary policy for July-December period.
“Monetary tightening can bring down inflation, but it has unacceptably high costs in terms of output and employment which Bangladesh can ill afford at present in view of its growth and poverty reduction imperatives,” he said.
Deputy governors of BB were present at the press conference held at its conference room.
The 12-month average CPI (consumer price index) was 7.2 percent in 2006-07 and rose to a high of 10 percent in March 2008 and then declined to 9.87 percent in May. The private sector credit increased by 24.5 percent in May on a year-on-year basis and the average flow was 22.3 percent during July-May of 2007-08 compared to 15.6 percent over the same period of the previous fiscal year.
The IMF at a press briefing on Tuesday last adviced the BB to incorporate 'less expansionary' monetary policies to reduce the soaring inflationary pressures and rapidly rising private sector credit flows.
“BB does not do anything deliberately that may hamper private sector credit needs,” the governor categorically said. “Rather the BB would closely monitor the private sector credit flow so that it is not gone to unproductive sector.”
He said the country needs higher growth and increased production of essential food and other items to ease the inflationary pressures. So there is no way to squeeze the credit at present, he added.
The BB has been announcing its monetary policy stance on a biannual basis through the Monetary Policy Statement (MPS) since January 2006. This is the 6th MPS BB announced yesterday.
The prime objective of the policy stance for H1 FY09 is to ensure price stability what the BB said is essential to sustain high economic growth. The policy stance targets real gross domestic product (GDP) growth rate of 6.5 percent and an average inflation rate of around 9 percent in the current fiscal year.
But the implementation of the policy faces several downside risks, which might make monetary management challenging in 2008-09. The challenges are: Possibility of floods and other natural disasters, socio-political instability, power shortage and other infrastructure bottlenecks and ensuring a congenial business climate. Prices of oil and other commodities are the other major challenges. To bring a balance in the overheated capital market is another challenge.
But the current inflationary pressures surpassed all these challenges.
“The persistent rise in inflation during most of the period of 2007-08 was contributed by both internal shocks and external developments,” BB governor said in his statement. He cited example of other South Asian countries where the inflation rate hovered around double-digit level in the past months.
He hinted a negative impact on the inflation as the government raised the prices of compressed natural gas (CNG), fuel oil and fertilizer significantly in June and July.
“While the impacts are yet to be seen these adjustments may somewhat push up the point to point inflation temporarily, but an increase in supply of goods and prudential policy measures of the government and the BB the impact may be avoided,” Salehuddin Ahmed said.
The governor also briefed on the BB policies that have promoted the businesses in the country. These are financing low-cost credit to SME and women entrepreneurs and housing loan to lower-income group.
Salehuddin Ahmed said the success of the policy stance requires greater fiscal and monetary coordination. He also adviced the government to limit its dependence on financing fiscal deficit by bank borrowing to reduce inflationary pressure.
Reviewing the immediate past policy, he said it was positive. The policy played an important role in bringing the economy back to its growth momentum although there was a surge in inflation, he added.