BB cuts key policy rates

The central bank unveiled on Wednesday an expansionary monetary policy for the current fiscal year aiming to speed up recovery of the pandemic-hit economy.

As part of the expansionary policy stance, the Bangladesh Bank slashed overnight repurchase agreement (repo) rate by 50 basis points to 4.75 per cent while cut reverse repo rate to 4.00 per cent from 4.75 per cent.

The central bank cut the policy rates to ensure the availability of cheaper funds for banks and greater flow of funds into the economy.

Besides, the bank rate has been re-fixed at 4.0 per cent from 5.0 per cent to rationalise it with the current interest rate regime.

“All these rates change will be effective soon,” the BB said in its monetary policy statement (MPS) for the fiscal year (FY) 2020-21.

The BB’s latest move came after slashing the cash reserve requirement (CRR) by 1.5 percentage points to 4.0 per cent from 5.50 per cent to help the banks implement the government-announced stimulus packages aimed at boosting investments in productive sectors.

“The policy stance for FY’21 may clearly be considered expansionary at the same time accommodative, which primarily aims to reinstate economic activities capturing the inflation under control to a level that existed before the Covid-19,” BB governor Fazle Kabir said about the main objective of the MPS.

Talking to the FE, Mustafa K Mujeri, a former chief economist of the central bank, said the expansionary monetary policy will allow the banks to scale up investments in different sectors.

“The demand for credit will, however, depend on revamping the overall economic activities,” said Dr. Mujeri.

The senior economist recommended strengthening monitoring and supervision to ensure the proper use of such credit.

The central bank also identified five risk factors, including the uncertain length and depth of the Covid-19 pandemic for attaining the monetary objectives during this fiscal.

Other risk factors are looming global recession, unexpected inflationary pressure on the economy, escalating pressure on non-performing loans in the country’s banking sector and possible natural disasters, including seasonal floods.

“The success of the policy will depend on mitigating such risk factors,” a BB senior official told the FE.

Mindful of the risks, he said the central bank is working on achieving the maximum economic growth target while curbing the inflationary pressures on the economy.

The BB projects GDP (gross domestic product) growth of 8.20 per cent for FY ’21 while 12-month average inflation to be 5.4 per cent in June 2021 in line with the projection made in the national budget.

“BB’s annual monetary programmes are outlined making sure that there are enough rooms for money and credit growth to sufficiently support the targeted nominal GDP growth,” the statement said.

The central bank, however, fixed domestic credit growth target at 19.3 per cent for FY ’21 while goals of broad money (M2) supply and reserve money have been projected at 15.5 per cent and 13.5 per cent respectively.

The private sector credit growth target has been set at 11.5 per cent and 14.8 per cent respectively for the first half (H1) and the second half (H2) of the FY ’21 while the public sector credit growth target at 35.6 per cent and 44.8 per cent respectively.

The policy, however, said BB’s expansionary and accommodative stance along with the implementation of the various stimulus packages on top of base effect are likely to augment the private sector credit growth to its programmed level.

Still, the central bank warned the possible crop loss due to natural calamities would stoke price bubbles in near future.

The country’s average inflation as measured by consumer-price index (CPI) rose to 5.65 per cent in June last from 5.61 a month before. It was 5.48 per cent in June 2019.

The central bank recommended monitoring of domestic price developments continuously to curb the possible inflationary pressure on time.

Prime Minister Sheikh Hasina has so far announced a total of 19 stimulus packages worth Tk 1.03 trillion to offset the economic shocks stemming from the novel coronavirus pandemic.

About revamping economic activities, the central bank said the recovery of the economy calls for a target-oriented, sector-specific plan along with the availability of sufficient liquidity in the system, and the effective implementation of the plan, despite the risk factors.

“For the implementation part, the coordinated and concerted efforts by all relevant stockholders like banks, businesses, and the government are required in addition to the BB’s fully engaging and vigilant role in monitoring and taking timely actions, where necessary,” the policy statement noted.

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