Bank loan interest rate increased again

Maximum interest rate 11.18 pc

Staff Correspondent: Bangladesh Bank has once again increased the policy interest or repo rate by 50 basis points to reduce the high inflation prevailing in the country. As per the new decision, the repo rate will be 7.75 percent from today. Earlier, the repo rate was hiked by 75 basis points on October 4. Accordingly, the repo rate increased by 1.25 percent in just two months. Apart from increasing the repo rate, the central bank has also announced an increase in the interest rate on bank loans.
In a related notification issued by the central bank yesterday evening, it is said that the upper limit of the standing lending facility (SLF) interest rate of the policy interest corridor has been increased from 9.25 percent to 9.75 percent. At the same time, the floor of the standing deposit facility (SDF) interest rate in the policy interest corridor has been revised from 5.25 percent to 5.75 percent. Apart from this, the existing margin applicable with SMART or Six Months Moving Average Rate of Treasury Bills has been increased by 25 basis points in determining the loan interest rate. These decisions will be effective from today.
Scheduled banks of the country borrow money from Bangladesh Bank at policy interest rate. Due to the increase in interest rates, more money has to be borrowed from the central bank. It will affect all public and private sectors of the country. Banks of the country will increase interest rates on deposits as well as loans. Bangladesh Bank informed that the repo rate has been increased to control the flow of money in the market.
According to Bangladesh Bureau of Statistics (BBS) data, the country’s average inflation rate last October was 9.93 percent. The central bank has set a target of reducing the inflation rate to 8 percent by December and 6 percent by June 2024. It has been demanded from the central bank that the bank loan interest rate has been increased along with the policy interest rate for the implementation of this target. The notification sent by the central bank said that the contractionary measures followed by the Bangladesh Bank will continue until the inflation target is achieved.
In the face of businessmen’s demands, Bangladesh Bank set the maximum interest rate of bank loans at 9 percent from April 1, 2020. However, the upper limit of 9 percent was lifted at the beginning of the current financial year while fulfilling the conditions for obtaining loans from the International Monetary Fund (IMF). Now at the beginning of every month Six Months Moving Average Rate of Treasury Bill or Smart Rate is announced. The announced smart rate for this November is 7.43 percent. Banks could have added interest of up to 3.5 percent. As a result of the central bank’s new decision, banks will now be able to add interest up to 3.75 percent. In that, the maximum interest rate of bank loans will increase to 11.18 percent.
A press conference was organized by the central bank yesterday to announce the decision to increase the policy interest rate. Chief Economist of Bangladesh Bank Dr. Md. Habibur Rahman said, “I don’t see any option to increase the interest rate to control inflation.” If the bank loan interest rate increases, people will borrow less than before. And those who have surplus money, they will keep money in the bank in the hope of more profit. It will gradually bring inflation under control. We want to reduce inflation to 8 percent by next December. To reach this goal, if necessary, the decision to increase the interest rate may come.
In response to a question, he said, “The results of economic decisions take some time. Unfavorable weather often hampers the desired results. Earlier we had taken several decisions. But due to rainy season, good results were not obtained. Now there is no weather problem. So, I hope to reach the desired goal very soon.
Dr. Md. Habibur Rahman said that at the moment achieving GDP growth is not the main goal of Bangladesh Bank. The main objective is to bring inflation under control. If necessary, GDP growth will be slightly lower. However, the main problem should be addressed first. In the meantime, the importance of disbursement of small and agricultural loans has been increased. Due to the development of Padma Bridge, various railways and roads, economic problems will be solved easily.
According to Bangladesh Bank, the first meeting of the reconstituted Monetary Policy Committee (MPC) was held on November 22 on a virtual platform under the chairmanship of Governor Abdur Rauf Talukder. Economist at the meeting. Sadiq Ahmed, Director General of Bangladesh Development Research Institute (BIDS). Committee members including Binayak Sen, Dhaka University Economics Department Chairman Professor Masuda Yasmin participated. As per the recommendation of that meeting, it has been decided to increase the policy interest rate.
Since the middle of 2021, the country’s inflation has been on the rise. The price of every commodity in the market has increased at an abnormal rate. According to BBS data, the country’s inflation rate was 9.63 percent last September. The rate of inflation rose to 9.98 percent in August. On October 4, Bangladesh Bank issued a notification to increase the policy interest rate by 75 percentage points to control inflation. Although it was seen at the end of October, the rate of inflation did not decrease in this month but instead increased to 9.93 percent.
Bangladesh Bank says the policy interest rate has been increased to reduce the supply of money in the market. However, the opposite picture is seen in the market. Banks are now borrowing more money from the central bank than ever, despite high interest rates. According to Bangladesh Bank’s data, before the decision to increase the policy interest rate on October 4, the daily borrowing amount from the central bank was limited to a maximum of Tk 10,000 crore. But since then, the amount of loans taken by the banks has increased continuously. On October 25, the banks borrowed the highest amount from Bangladesh Bank in the history of the country. On that day, the loan amount of the banks was Tk 24,455 crores. After that, the amount of loan taken daily is fluctuating at 15-20 thousand crores. On November 22, the borrowing amount of commercial banks from the central bank was Tk 23,941 crores.
According to the former governor of Bangladesh BankSalehuddin Ahmed, it is not possible to control inflation in Bangladesh by following the traditional monetary policy. He said, “In the Western countries including the United Kingdom, all economic structures including interest rates are market-based. But everything is controlled in our country. The economy of developed countries is almost 100% dependent on banks. More than half of our economy is still unbanked. The ongoing economic crises in Bangladesh including high inflation are caused by mismanagement, money laundering, corruption, lack of good governance, etc. For this reason, it will not be possible to reduce inflation by increasing the policy interest rate. In order to overcome the economic crisis including price inflation, major reforms in the financial sector of the country will be required.
Dr. Salehuddin Ahmed said, “The step of increasing the interest rate while controlling other elements of the economy will not be effective in this country. The initiative taken by Bangladesh Bank to reduce the flow of money in the market, the productive sector including SMEs, agriculture will be the first to suffer. Monetary policy will not have any effect on those who are withdrawing money in the name of loans from influential banks. Rather, attention should be paid to ensure that the supply line of products in the market does not collapse. Incentives should be given as necessary to ensure flow of money to productive sectors. Otherwise, the initiatives Bangladesh Bank is taking to control inflation will further fuel inflation.