Contractionary monetary policy to be unveiled today

Aim of reducing inflation

Zarif Mahmud: While inflation is falling around the world, it is rising in Bangladesh. There is a dollar crisis in the market. There is no money in the banks. The main responsibility of solving these problems of the financial sector is Bangladesh Bank. However, the central bank is unable to control the crisis.
Policy interest rates have been raised to control inflation. Bank loan interest rates are left to the market. But inflation has not come under control. The dollar crisis has not ended. Rather, inflation has been recorded in 13 years. Dollar reserves are decreasing. Still, Bangladesh Bank is walking on the same path with monetary policy. The new monetary policy will be announced on July 18. As earlier in the day, the regulator will announce a contractionary monetary policy by raising the policy interest rate.
The relevant senior sources of Bangladesh Bank have given this information.
The central bank tries to maintain the country’s economic development and stability through monetary policy twice in a fiscal year. In continuation of this, the new monetary policy will come this week. In this regard, the central bank says that the monetary policy for the first half of the current financial year will be kept contractionary in coordination with fiscal policy to control inflation. Analysts of this sector say that only contractionary monetary policy will not bring inflation control. The issue of supervision should be seen.
The interest rate ceiling has been lifted to 9 percent in the monetary policy for the first half of fiscal 2023-24, sources said. The new rules are based on a ‘smart approach’ to determine interest rates. Where 3.75 percent margin is said to be added with smart interest rate. At the beginning of this system, the bank loan interest rate was 10.10 percent in July last year, which reached 13.55 percent last April. After that from April 8 the interest rate was made market based. Some banks’ interest rates go up to 18 percent. Accordingly, the interest rate has increased by about 8 percent in a year. Many financial institutions have increased by around 10 percent. In the new monetary policy, the interest rate of bank loans will be kept based on the market.
On the other hand, Bangladesh Bank has already increased the policy interest rate to reduce the flow of money in the market. Still, there was no good news on inflation. The inflation target was set at 6 percent in July last fiscal. There, the average inflation for the just concluded fiscal year 2023-24 stood at 9.73 percent, which is the highest in the last 13 years. Bangladesh Bank, which has completely failed to control inflation, may increase the policy interest rate this time. Through this, inflation will be targeted at less than 7 percent.
Acting spokesperson and executive director of Bangladesh Bank Saiful Islam said, Bangladesh Bank has used all tools to control inflation. Controlling inflation by controlling interest rates or increasing the money supply to reduce commodity prices is also not working. Because here market control depends on syndicates, devaluation of money against dollar and many factors of world market.
Bangladesh Bank has already held a meeting with the stakeholders for the monetary policy to be announced on July 18. Chaired by the governor, four deputy governors, Dhaka University economics department professor Sayema Haque Bidisha, economist Abu Yusuf, Association of Bankers Bangladesh (ABB) chairman Salim RF Hussain and Sonali Bank managing director Md. Afzal Karim
In a meeting with the stakeholders, Bangladesh Bank Governor Abdur Rauf Talukder said, ‘This year’s monetary policy will also be kept contractionary in coordination with fiscal policy to control inflation. In the last two monetary policies, we have done interest rate based monetary policy out of money supply based monetary policy. We can bring down inflation below 7 percent within the current financial year.
In this regard, a senior official of the central bank told that the monetary policy for the first half of the current financial year includes the decision to increase the policy interest rate, reduce the crawling peg and reduce defaulted loans. Interest rates are already over 14 percent. Yet there are plans to raise policy interest rates to make money more expensive. As a result, the loan interest rate may increase further.
Regarding the new monetary policy, Bangladesh Bank’s former governor Salehuddin Ahmed told that Bangladesh Bank has policy weaknesses in bank account supervision. Policy should be taken strongly. Do not wait for the above instructions to make a decision. Bangladesh Bank has to take necessary decisions for the sake of economy. Only contractionary monetary policy does not control inflation. There are goods in the market. But market monitoring is not happening. This is something to watch.
Former senior IMF official and Policy Research Institute (PRI) executive director Ahsan H. Mansoor told, “Inflation control is the most important indicator to achieve macroeconomic stability. This is how monetary policy works. Our inflation is at an all-time high. Monetary policy must be contractionary to reduce inflation. At the same time, banks should be closed by printing money. In order to curb inflation, money printing must be stopped now.