Two ex-governors of Bangladesh Bank with divergent viewpoints are viewing the H1 Monetary Policy Statement (MPS), applicable to the first half of the 2023-24 fiscal, as a routine response to the call for moving towards a market-based interest rate, towards a unified exchange rate and efforts to curb inflation.
Dr Atiur Rahman, who served as the 10th governor of Bangladesh Bank from 2009-16, told UNB that the rise in the policy rate by 50 basis points (0.5%) would make credit costlier for the banks from the central bank, which would be passed through to borrowers. This will help the central bank mop-up excess liquidity from the market.
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“Both broad money in circulation and private sector credit growth have been reduced to make the monetary policy look contractionary,” he said, comparing the policy to others in the region. “This is certainly a move in the right direction as many of our neighbouring central banks like RBI and Bank of Thailand have been pursuing such contractionary policy for quite some time achieving inflation rates of 4.3 percent and 2.7 percent respectively.”
“Indeed, inflation is essentially a monetary phenomenon and should be treated as such,” Dr Atiur said, quoting the quantity theory of money, according to which prices vary in proportion to the money supply.
He said the current monetary policy of Bangladesh tries to make credit costlier by raising both policy rates and providing flexibility in setting interest rates based on a reference rate plus a margin of 3 percentage points that banks can add on.
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The broad money and private credit growth rates have been reduced to reduce the money supply in the market. If implemented well, Dr Atiur said, this monetary policy will give a proper signal that the central bank is willing to use the tools at its disposal to address inflation which has been rising persistently.
The monthly inflation rate in May soared to a decade-high of 9.94%, up from 9.24% in April, according to the Bangladesh Bureau of Statistics (BBS). Dr Atiur supports the move to come away from the previous policy setting a ceiling on the interest rate.
“Interest ceiling was not a well-designed policy. When inflation crossed this ceiling rate, large entrepreneurs started getting loans at negative real rates of interest. This encouraged the willful borrowers to take more loans, not necessarily for productive investment. The risk of a rise in non-performing loans increased in the process,” he added.
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He noted that the interest rate cap (ceiling) has been removed partially - the central bank will still have control over the reference rate, which it said will be based on the average interest rate of the six-monthly treasury bond.
“The auctions of this bond are managed by the central bank. Yet, this is a step forward in the right direction,” he said.
“The central bank will continue to print money as the public borrowing will increase by three percentage points. There is nothing wrong in it if the government spends this money for productive development projects instead of salaries or other unproductive activities,” Dr Atiur said.
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As for the foreign exchange market, Dr Atiur believes it will stabilise once the single, unified exchange rate is rolled out as there would be less speculation in the forex market. Instead, there will be more competition in the market and the exchange rate will vary within a band (up to 2 percent) as stipulated by the Foreign Exchange Act.
Dr Atiur hopes Bangladesh Bank will guide the foreign exchange market to remain competitive.
His immediate predecessor as governor of the central bank, Dr Salehuddin Ahmed, also said the contractionary monetary policy should help to reduce inflation.
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He too expects neither the interest rate nor the exchange rate to be fully market-based as Shapla Chottor would continue to exercise indirect control through its reference rate.
Dr Salehuddin also doubts the inflation rate would ultimately be curbed due to concerns over proper and independent implementation of the monetary policy statement within the current climate.