New monetary policy to give priority to controlling the rise in commodity prices

Economists suggest removing interest rate cap and reducing credit flow for effective price stability

June 28, 2022, 10:45 a.m.

Last modification: June 28, 2022, 11:09 a.m.

Bangladesh Bank file photo: Salahuddin Ahmed/TBS


Bangladesh Bank file photo: Salahuddin Ahmed/TBS

The Bangladesh Bank is prioritizing reduction in commodity prices, among others, in formulating monetary policy for the financial year 2022-23, according to its latest report on the macroeconomic situation of Bangladesh.

Other priorities are the stabilization of foreign exchange markets, while keeping foreign exchange reserves and public debt at a comfortable level.

The central bank’s target is to keep inflation at 5.6% in line with the proposed budget, while GDP growth is expected to be 7.5%.

Bangladesh Bank Executive Director Sirajul Islam told The Business Standard (TBS) that volatility in global commodity markets and the ongoing Russian-Ukrainian war are having a negative impact on the local market.

“The central bank will formulate monetary policy taking into account these issues and take measures to control price increases,” he added.

As in the past two years, Bangladesh Bank Governor Fazle Kabir is due to unveil the new monetary policy on the last day of the current fiscal year, June 30 (Thursday).

Monetary policy for the 2021-22 financial year has focused on implementing the stimulus package announced by the government to facilitate recovery from the negative economic impact of Covid.

Economists suggest the Bangladesh Bank should reduce credit flows and lift the interest rate cap to effectively curb price hikes.

“Obviously, the Bangladesh Bank should work towards stabilizing the exchange rate and inflation. Monetary policy should be tightened further,” Ahsan H Mansur, executive director of the Research Institute, told The Business Standard. on the policies of Bangladesh.

Private sector credit could see a decline in the next fiscal year, which is not a matter of concern at the moment, he said, adding that interest rate policy should be determined in first.

“Government should reverse fixed interest rates [6% on deposit and 9% on borrowing]. The central bank knows very well whether they will or not, but I think they should do it now.”

Over the past two months, the flow of credit to the private sector was on the rise – mainly supported by increased import financing – but was below the target set for FY22, while inflation rates exceeded the target and broke long-standing records.

The year-on-year growth in cash flows to the private sector was 12.94% in May this year (the highest in 41 months), 12.48% in April and 11.29% in March, against a target of 14.8% for the financial year (FY22), according to the Bank of Bangladesh.

On the other hand, inflation soared to 7.42% year-on-year in May this year (the highest for eight years), 6.29% in April and 6.22% in March, against only 5.4% set for the year, as prices for food items rose significantly.

Central bank officials said the new monetary policy for the next fiscal year could tighten money flows by lowering the ceiling on credit growth to curb inflation keeping in line with many other central banks around the world.

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