High Interest Rate Deterrent to Investment

Bangladesh Bank (BB) raised it policy rate at a time when the interest rate was following a downward trend in the global economy. Then, it did the opposite when the interest rate was following an upward trend in the global economy.

This time BB appears to have been consistent with the global trend in rate-setting decisions. Most central banks of the developed world have either raised or put on hold their benchmark rates in recent time. Despite President Trump’s strong desire to lower the policy rate, his Fed Chair, Kevin Warsh, could not slash the policy rate but rather increased it by 25 bps.

Even central banks of many emerging markets have also paused their benchmark rates. As a part of monetary policy for the quarter from October to December 2026, BB has kept their policy rate, 9.50%, unchanged. BB has also maintained its Standing Lending Facility rate and Standing Deposit Facility rate at 11% and 7.5%, respectively.

BB’s decision regarding interest rate suggests that it is very much consistent with the global trend and, as such, seems to be in the right direction. Now it is also necessary to consider whether the state of the economy in Bangladesh is consistent with the global economy. The answer to this question will be negative, because despite multiple challenges, the global economy of both developed and developing countries has remained in a stable condition. On the other hand, the economy in Bangladesh has been passing through a dire situation. While announcing monetary policy, BB has admitted the country’s economic downturn, estimating real Gross Domestic Product (GDP) at 4.3% in fiscal year 2026 and third-quarter growth at 2.26%. BB has indicated a contraction of industrial growth by 0.28% over the period. Even the World Bank (WB) and International Monetary Fund (IMF) have recently revised growth projections downward to 3.50% and 4.3%, respectively. Whereas average economic growth during the last one and a half decades, i.e., from 2010 to 2024, was always above 6%. These dismal economic data released by BB and multilateral organisations imply how bad the condition of the economy is going through. So, to what extent will a policy rate decision in line with the global trend be beneficial for the economy, which is not in line with the global economy? This is not known to us.

Central banks always justify their policy rate decision by targeting inflation under their desired rate. When inflation rises, central banks also raise their benchmark rates, and vice versa. How the inflation target is achieved merely through using central banks’ instrument of policy rate remains a debatable issue. Nevertheless, the manoeuvring of benchmark rates in controlling inflation is found to have produced some results in the economy where systematic measures, particularly standardised pricing policies, are in place. As opposed to a systematic economy, a policy rate does not play any visible role in controlling inflation in the unsystematic economy, like in Bangladesh, where non-monetary factors are more forceful than monetary factors in a price spiral. 

Reviving the economy requires massive investment, particularly private sector investment, which will not take effect if the cost of funding remains unreasonable. Again, the cost of funds is determined by the interest rate on loans, which is influenced by the central bank’s benchmark rate. If the benchmark rate is cut, the lending rate also declines, which eventually keeps the cost of funds lower or vice versa. Therefore, when the economy is in an expansionary state, the policy rate is raised to discourage or limit investment. Conversely, when the economy is in a downturn requiring massive investment, the interest rate is kept as low as possible with the objective of encouraging massive investment, which has not been followed in BB’s present rate-setting decision.

Economy in Bangladesh requires massive investment in both the public and private sectors so as to boost economic growth. Private sector investment is in very dismal condition, and there is no sign of new investment, while existing investment has been struggling to survive. Without investment, employment generation will not take place; resultantly, collective demand will not rise, requiring further investment and thus more employment, which results in more collective demand. This is how an economy bounces back and revives. However, investment in the private sector will not grow if the interest rate is not kept minimum. If BB’s policy rate remains 9.50%, banks’ lending rate will vary between 14% and 16%, which is unusually very high. With this exorbitantly high interest rate, investment can hardly be found viable. Because the loan amount at this rate will double within five years, but businessmen can hardly generate enough margin to ensure debt service. It is obvious that if BB resorts to lowering the benchmark rate, inflationary pressure may not be controlled or go up again, but the reality is that inflationary pressure is sometimes conceded for the sake of greater economic interest. The bottom line is that if we do not keep the interest rate as low as possible, private sector investment will not grow, because high interest is the deterrent to the investment growth.

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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada. 

He can be reached at