Policy Rate Raised by 25 Basis Points, Private Credit Growth Target Reduced to 10%

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The Bangladesh Bank took decisive action by increasing the policy rate by 25 basis points to 8% from 7.75% while unveiling a new monetary policy for the second half (January-June) of FY24 on Wednesday, January 17.

Governor Abdur Rouf Talukder of the Bangladesh Bank announced the adoption of a contractionary policy stance aimed at tightening the money supply to curb inflation. Additionally, the central bank introduced a new exchange rate mechanism called the crawling peg.

In a bid to address economic challenges, all monetary targets were revised downward, with the private sector credit growth target for June reduced to 10% from the previous target of 11%. The central bank cited global fuel price dynamics, instability in the Middle East, international commodity prices, inflation reduction, exchange rate stability, and the enduring issue of non-performing loans as significant challenges.

The unveiling of the policy came less than a week after the formation of the new government, with Prime Minister Hasina emphasizing the government’s commitment to combating inflation and urging ministers to take proactive measures to control the prices of essential goods.

Bangladesh Bank spokesperson Mezbaul Haque affirmed the continuation of the contractionary trend to manage inflation, emphasizing the institution’s dedication to depositors’ security and corporate governance.

Reflecting on the challenges faced in 2023, a senior official of the Bangladesh Bank highlighted the transition from a money supply-based monetary policy to an interest rate-based approach in FY24. Despite efforts to control inflation, recent data from the Bangladesh Bureau of Statistics indicated that inflation stood at 9.41% in December, higher than the projected 8%.

In the first six months of FY24, the repo rate was raised by 50 basis points to 6.5%. However, due to the ineffectiveness of this measure in controlling inflation, the policy rate underwent multiple increases over the last six months, culminating in the latest adjustment to 7.75% on November 27.

In the monetary policy for the first half of FY24, the Bangladesh Bank adopted a contractionary stance, aiming to tighten money flow to the private sector and revising the private sector credit growth projection to 11% for FY24, down from the previous target of 14.1% set for FY23. The policy also introduced four key reforms, including the implementation of a policy interest rate corridor, a reference interest rate for lending, exchange rate unification, and a revised method of calculating gross international reserves in accordance with the Balance of Payment and International Investment Position Manual (BPM6).