Farhad Chowdhury: There is a similarity between inflation and temperature as the real impact exceeds the calculated one in both instances.
The average inflation rate now stands at 9 per cent here, but its impact on low-income people is more than twice of the rate.
Although there was a commitment to keeping the inflation rate below the threshold of 6 per cent, the government, or the Bangladesh Bank (BB) have blatantly failed to maintain it.
Here, the responsibility solely lies with the central bank, and it must be held accountable.
There are numerous instances of central banks being held accountable to the government and the public.
An uncontrolled inflation rate essentially undermines a government’s popularity and hits the low-income people hard. It is the people’s right to know why inflation could not be controlled. There are different laws in place across the world, to safeguard the right and ensure smooth information flow to the public.
Almost all countries have a distinctive framework for accountability. According to Article 45 of the RBI Act in India, if the central bank – Reserve Bank of India (RBI) – fails to tame inflation for three consecutive quarters, its governor must submit a written report to the union government within the next month. The report should incorporate an action plan to control inflation and an estimated timeframe to achieve the target.
In the United Kingdom, the governor of the Bank of England must exchange open letters with the chancellor of the exchequer (finance minister) if inflation exceeds the target.
The governor, in the letter, explains why inflation could not be controlled and outlines the steps being taken to achieve the target. Besides, the letter should be made public on the central bank website.
A similar practice prevails in the Philippines, where the central bank has to write an open letter to the president and the public in case of failure to control inflation. The bank publishes the letter on its website.
The central bank governor in Canada has to write a similar letter to the government. Besides, the bank has to sign a joint agreement with the government after every five years, on the inflation target and strategies to achieve it. The governor is accountable if the inflation target is not met.
In Turkey, the central bank governor has to submit a report to the government in the case of failure to meet the inflation target.
In all the cases, none but the central bank governors are held accountable. But why?
The responsibility of inflation control was vested on central bank governors after the beginning of the high inflation chapter in the world economy in the mid-1960s, which continued until 1982.
The idea of inflation targeting also emerged during the period. New Zealand became the first nation to formulate a monetary policy after setting an inflation target. Other countries started to follow the suit, after the economic recession of 1997. Most of them set a common target to keep inflation rates within 2 to 4 per cent.
In Turkey, president Recep Tayyip Erdogan usually does not follow the basic economic principles. He continued to lower interest rates despite the global economic crisis. The imprudent actions eventually resulted in a 85 per cent inflation in 2022.
However, Erdogan had to return to the basic principles. After being reelected, he appointed a new governor to the central bank, Hafize Gaye Erkan, a former Wall Street banker, who raised interest rates significantly in August.
There is a similarity between Bangladesh and Turkey as policymakers in both countries were initially stubborn not to raise interest rates. The rate in Bangladesh was fixed at 9 per cent to appease certain business interests. However, the policymakers eventually had to shift the policy and increase interest rates.
Like Turkey, Bangladesh delayed in taking the decision of raising interest rates.
The effective use of monetary policy is the key tool that central banks resort to tame inflation. It implies controlling the money supply by adjusting interest rates. The monetary policy department is responsible for taking care of the issue.
All the central banks have designated committees to formulate monetary policy. However, Bangladesh is an exception here too.
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