Bangladesh Bank (BB) is poised to unveil its monetary policy for the first half of the fiscal year 2024-25 in the third week of July, with a focused intent on curbing persistent inflation. Since March of the previous year, inflation in Bangladesh has remained stubbornly high, hovering above 9 percent. Despite the central bank’s stringent monetary policy stance, consumer prices have yet to show significant signs of cooling.
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A member of the monetary policy committee has indicated that the BB plans to announce the new monetary policy between July 15 and July 20. In preparation for this, the monetary policy department will commence consultations with stakeholders and economists starting July 7, 2024. This process will include a crucial meeting with central bank officials of executive director grade and above on July 7 to gather insights for the new policy framework. Subsequent discussions with other stakeholders and economists will continue until July 15, 2024.
IMF-Backed Measures and Policy Rate Hikes Fail to Curb Inflation: What’s Next?
Despite the central bank’s concerted efforts to address economic challenges, including soaring inflation, the impact has been limited. Over the 12 months from June 2023 to May 2024, the inflation rate averaged 9.73 percent, significantly exceeding the BB’s target of 7.5 percent for the fiscal year 2023-24. The government has now set an ambitious goal to reduce the consumer price hike to 6.5 percent for the fiscal year 2024-25.
In response to the inflationary pressures, the BB has implemented a series of policy rate hikes since May 2022, aiming to increase the cost of borrowing and, consequently, temper inflation. These measures underscore the central bank’s determination to restore economic stability and achieve its inflation targets, as it prepares to introduce its forthcoming monetary policy.
Inflation Rate Trends:
- Average Inflation (June 2023 – May 2024): 9.73%
- Target for FY 2023-24: 7.5%
- Target for FY 2024-25: 6.5%
In May 2024, Bangladesh Bank (BB) took decisive steps to address the challenge of soaring inflation by raising the policy rate by 50 basis points to 8.5 percent. Concurrently, in alignment with International Monetary Fund recommendations, the central bank adjusted bank interest rates and the US dollar exchange rate. Despite these measures, inflationary pressures persisted, prompting speculation among central bank officials about the necessity of further policy rate hikes to effectively curb inflation.
Notably, the BB continued to inject liquidity into underperforming banks, a practice that has mitigated the impact of its tight monetary policy stance on inflation. Experts within the economic cycle emphasized the urgency of escalating the policy rate beyond its current 8.5 percent level to at least 10 percent. This recommendation underscores the imperative of more robust monetary measures to tackle persistent inflation effectively.
BB Governor Acknowledges Challenges in Controlling External Factors Impacting Inflation
In its last monetary policy for the January-June 2024 period, Bangladesh Bank (BB) maintained a resolute contractionary stance aimed at mitigating persistent inflationary pressures. Aligned with the government’s economic objectives, BB’s policies were geared towards supporting a revised GDP growth target of 6.5% while endeavoring to cap inflation at 7.5% for the previous fiscal year. Notably, food inflation surged to 12.54% in August 2023, marking a 13-year high, as reported by the Bangladesh Bureau of Statistics (BBS).
To implement its strategy, BB opted to raise the benchmark policy rate by 25 basis points to 8%, signaling a firm stance on controlling inflationary pressures. Concurrently, adjustments were made to the Standing Deposit Facility (SDF) rate, increasing it by 75 basis points to 6.50% from 5.75%, thereby narrowing the policy rate corridor to ±150 basis points. Conversely, the Standing Lending Facility (SLF) rate was marginally reduced by 25 basis points to 9.50% from 9.75%.
Monetary Policy Adjustments (Previous monetary policy):
- Policy Rate Increase: 25 basis points to 8%
- SDF Rate Increase: 75 basis points to 6.50%
- SLF Rate Decrease: 25 basis points to 9.50%
Addressing the outcomes of the preceding monetary policies for the first half of fiscal year 2024, BB’s governor acknowledged the time lag in realizing policy impacts, particularly in mitigating external factors such as fuel and commodity prices which remain beyond the direct control of monetary measures.
Crawling Peg Mechanism for Exchange Rate Stability
In a bid to curb irregularities within the banking sector, measures were being rigorously enforced in BB’s previous monetary policy. However, experts voiced concerns over the perceived insufficiency of these steps. A mere 0.25% hike in the policy rate was noted as insufficient at that time, suggesting a more substantial increase, ranging from 0.5% to 1%.
The goal of 7.5% inflation was not particularly ambitious too, especially when compared to India’s success in maintaining inflation between 3-4% and the USA’s aim for 2% or lower. The previous monetary policy statement also revealed the Bangladesh Bank’s adoption of a crawling peg system to manage abnormal fluctuations in the foreign exchange rate. This system allows the currency to adjust within a specified band, providing greater stability in the forex market.
Additionally, the policy statement announced a reduction in the private sector credit growth target from 11% to 10%. When considering both public and private sectors, domestic credit growth is projected to reach 13.9% by the end of June 2024.
The exchange rate dynamics of the Bangladesh Taka (BDT) against the USD are meticulously managed in accordance with market conditions, supported by thorough assessments using the Real Effective Exchange Rate (REER) Index and internal evaluations. Despite experiencing marginal depreciation from July to December 2023 compared to the previous year, the BDT closed the year at 110.00 per USD as of December 31, 2023, which is now hovering around 118.00 per USD.
Inflation Target:
- (2023):
- India: 3-4%USA: 2%
- Bangladesh: 7.5%
- (2024)
- India: 4.5%USA: 2%
- Bangladesh: 6.5%
This rate positioning maintains competitiveness relative to peer countries, as evidenced by the comparative magnitude of recent depreciation against other currencies in the region. Bangladesh Bank introduced a crawling peg mechanism based on a currency basket in its previous monetary policy, initially implementing a band corridor approach before transitioning to a more flexible exchange rate regime.
The crawling peg system allows the exchange rate to fluctuate within predefined boundaries, facilitating market-driven adjustments while enabling central bank interventions to prevent excessive exchange rate volatility. This strategic move was aimed at stabilizing the foreign exchange market and safeguarding against abnormal fluctuations, thereby supporting broader economic stability objectives.
As Bangladesh progresses towards this transitional phase in exchange rate management, the upcoming monetary policy announcement holds utmost importance in the country’s economic corridors, with hopes for a reversal from its current volatile situation.
