Monetary policy fy23: Key tools not there to rein in inflation
"The monetary programmes will not help contain inflation immediately for the absence of effective tools."
Bangladesh Bank yesterday attached the highest importance to curbing inflation in its monetary policy for fiscal 2022-23 but didn't deploy major monetary tools needed to ride out the current economic crisis.
Economists have long been suggesting that the central bank withdraw the lending rate cap of 9 percent or make it flexible to contain inflation and restore stability in the foreign exchange market.
Though the BB hiked the policy rate by 50 basis points to 5.50 percent yesterday, it didn't change the lending rate cap.
BB Governor Fazle Kabir unveiled the monetary policy statement at the central bank headquarters in the capital.
"We will give all-out efforts to contain inflation and keep the foreign exchange reserves stable. The central bank will then give attention to GDP growth," he said.
Inflation surged to an eight-year high of 7.42 percent in May, driven by a hike in food costs.
Inflation averaged 5.99 percent during the July-May period in contrast to the government target of 5.7 percent.
The government has set an inflation target of 5.6 percent for FY23 starting today.
Economists say the increase in the policy rate is definitely good, but the economy will not reap the benefit immediately from the monetary policy.
The policy rate has been hiked twice within a month for the first time since it was introduced in 2003. The BB raised it by 25 basis points on May 29 and by 50 basis points yesterday.
The policy rate is a pivotal benchmark interest rate that commercial banks follow for fixing interest rates on both loans and deposits. A spike in policy rates makes loans more costly.
Quoting the policy rate, cash-strapped banks take short-term loans from the BB and then disburse those to individual borrowers.
Talking to The Daily Star, Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the monetary programmes will not help contain inflation immediately for the absence of effective tools.
The increase in policy rate will create liquidity pressure in the banking sector but it will take time to slow down the money supply, he pointed out.
Had the BB withdrawn the lending rate cap or made it flexible, inflation could have been managed efficiently in the quickest possible time, he said.
Yesterday, the BB set a lower private sector credit growth target of 14.1 percent for FY23, compared to 14.80 percent in FY22.
Md Habibur Rahman, chief economist of the central bank, said the new target was higher than the achievable target for this fiscal year.
As per the BB projection, the credit growth will be at 13.1 percent in the last fiscal year.
"The central bank set the lower credit growth target to reduce the supply of money to the market," he mentioned.
Fazle Kabir said the global economy is now facing an uncertainty due to the ongoing Russia-Ukraine war, which is why the International Monetary Fund recently cut the global growth projection.
The prices of major commodities, including petroleum, have been on the rise in the global market due to the war, he said.
Amid such a situation, the country's import payment has shot up in recent months.
Between July and April in FY22, imports went up by 41 percent to $68.66 billion, bringing the reserves down to $41.7 billion on June 28. The figure was $46.15 billion on December 31 last year.