Bangladesh Lowers Rates for First Time Since 2009 to Spur Growth

Bangladesh cut interest rates for the first time since 2009 to support economic growth, citing risks to expansion from an uncertain global outlook.

Bangladesh Bank lowered its benchmark repurchase rate to 7.25 percent from 7.75 percent, it said in Dhaka today. The monetary-policy stance for January through June seeks to bolster investment in productive industries, avert asset bubbles, damp inflation and minimize excessive currency swings, it said.

The nation follows India in reducing borrowing costs this month as an uneven global recovery clouds the outlook for its pivotal apparel exports. Bangladesh is under pressure to boost safety standards in the industry after recent deadly factory blazes. Central bank Governor Atiur Rahman has said labor conditions can improve without hurting competitiveness.

“The main challenge of the central bank in future would be how to control inflation and, at the same time, ensure higher economic growth,” Fahmida Khatun, the research director at the Centre for Policy Dialogue in Dhaka, said before the announcement.

The economy will expand more than 6 percent in the fiscal year through June 2013, in line with the 10-year average, though growth will probably fall short of the government’s 7.2 percent target, the central bank said.

The goal of an average inflation rate of 7.5 percent “appears achievable, though risks remain,” such as energy and food prices, it said. Consumer-price growth was 7.69 percent in December, moderating from almost 12 percent in September 2011.

Supporting Lending

The monetary authority said in today’s statement that it’s made room for increased lending, while remaining “committed to bringing inflation down further.”

Before today’s cut, the nation had raised the repurchase rate 325 basis points since August 2010 to damp price rises.

“Declining inflation has created the space for the repo- rate reduction, which should have an impact on lending rates and stimulate more growth-enhancing investments,” said Hassan Zaman, chief economist of Bangladesh Bank. “At the same time, BB is mindful of inflation risks and has calibrated the rate cut accordingly, keeping in mind this inflation-growth balance.”

More than 75 percent of Bangladesh’s population lives on less than $2 per day, World Bank data shows. A legacy of political instability and corruption are among obstacles to faster growth in the $119 billion economy to reduce poverty.

Source: Bloomberg