Inflation is the new normal

For a few months now, the central bank has been saying that it would be more clinical in dealing with inflation once the election is over.

But the key takeaway from the monetary policy unveiled on Wednesday is that inflation is the new normal -- a crushing blow for the poor and fixed-income demographic weary from battling a cost-of-living crisis for a good couple of years.

The central bank's only action of note was making the cost of funds -- as defined by the policy rate -- higher by 25 basis points, its eighth incremental hike since May 2022.

The desired outcome is that the higher cost of funds will discourage banks from borrowing more from the Bangladesh Bank. With fewer funds in the hands of financial institutions, industrials and individuals will have fewer funds in their hands, which, in turn, means they will have less to spend and that would bring down the aggregate demand.

With the aggregate demand down, the law of demand and supply will kick in and the price level will shift. And thus, inflation would have been conquered.

Such a wishful line of thinking would have been fine if the economy was showing signs of inflationary pressure and not when it has been mired in inflation for more than two years now, and more so, when it has a clear mandate from the newly-formed government on what to prioritise: inflation over growth.

Even then, BB's modus operandi for reining in price spirals would have passed muster were the cause of inflation demand-pull.

But it is cost-push inflation thanks to Bangladesh's overwhelming reliance on imports to sustain itself.

Almost every item consumed by the average citizen in Bangladesh in their everyday life is imported or produced with imported raw materials.

With the exchange rate scaling new heights every day, automatically the price of everything is rising. Unless the exchange rate is reined in, inflation cannot be reined in.

On Wednesday, BB Governor Abdur Rouf Talukder said the central bank was considering adopting a crawling peg system, a precursor to having a fully market-based exchange rate, on the advice of the International Monetary Fund.

But he did not specify when that system would be rolled out, meaning the exchange rate will continue to appreciate and with it, inflation.

With no action taken to fix the exchange rate, how much impact would steps to suppress demand have on inflation when demand is already low thanks to no corresponding growth in wages and drastically shrunken purchasing power? Not much.

If BB had to go down this route of managing inflation by policy rate cuts, it could have gone for its biggest rate hike yet as that could have addressed the situation in one fell swoop. What we have now is death by a thousand cuts.

And the biggest casualty of the latest monetary policy statement is the country's GDP.

Private sector credit growth, a barometer of industrial optimism, is already below the central bank's target for the next six months and given the higher cost of funds now, it will only go down.

In the first six months of the fiscal year, the opening of letters of credit for industrial raw materials, petroleum and intermediate goods have declined year-on-year, in yet another indication of the impending slowdown.

Lower economic activities mean lower employment, and that is never good news for the inflation-fatigued poor and low-income people.

The sensations suggest economic activities are now more subdued than during the depths of the pandemic.

Back then, there was hope that the virus would be contained with the vaccine soon and the economy would roar back to life right away.

This time, the end is not even in sight -- given the central bank's meek response, which has left the prospect of a sustained period of high inflation and economic stagnation not out of the question.