BB raises key interest rates to combat soaring inflation

Staff Correspondent: In a bid to combat surging inflation, Bangladesh Bank has implemented significant measures, including a series of policy rate hikes aimed at reducing the money supply and encouraging savings. The central bank on Sunday raised its key policy rate by 50 basis points to 9%, effective from Tuesday.
This latest increase marks the third hike this year and the tenth since May 2022. The Standing Lending Facility (SLF) rate and the Standing Deposit Facility (SDF) rate were also raised by 50 basis points, reaching 10.50% and 7.50%, respectively.
The decision was made during the central bank’s monetary policy committee meeting, presided over by Governor Ahsan H Mansur and attended by all members. The move is expected to increase the interest rate on funds borrowed by commercial banks from the central bank, which in turn will push up loan and deposit interest rates across the banking sector.
Bankers have noted that the hike will particularly impact commercial banks facing liquidity shortages, as borrowing from Bangladesh Bank will now become more expensive. The higher loan rates are anticipated to dampen consumer spending, helping to slow inflation over time.

However, the policy rate hike comes amid a backdrop of declining private sector credit growth, which fell to 9.8% in June according to Bangladesh Bank’s monetary policy for the first half of FY25.
Bangladesh Bank data reveals that the total money in circulation at the end of June 2024 reached Tk321,199 crore, up from Tk277,807 crore at the end of December 2023. This indicates an increase of Tk43,392 crore in just six months, contributing to inflationary pressures.
Inflation has become an increasingly urgent issue, with July witnessing a 13-year high of 11.66%. Food inflation reached a staggering 14.10%, while non-food inflation hit 9.68%. In comparison, June inflation was recorded at 9.72%, with food and non-food inflation standing at 10.42% and 9.15%, respectively.
Bangladesh Bank’s new governor has emphasized the need for continued rate hikes until inflation begins to decline. He also highlighted the importance of stabilizing the currency exchange rate as part of the effort to curb inflation.
Fahmida Khatun, executive director of the Center for Policy Dialogue (CPD), pointed out that while tightening the cash supply is necessary, government spending should be increased in specific areas, such as flood-affected regions. She recommended that farmers impacted by floods be offered low-interest loans to help them recover from the financial challenges posed by the natural disaster.