The Bangladesh Bank is set to announce a new monetary policy aimed at controlling inflation, along with policy improvements in various sectors.

The monetary policy for the second half (January-June) of the current fiscal 2023-24 is scheduled to be announced tomorrow, while the draft was approved in a board meeting of the central bank on Sunday.

The new policy will focus on enhancing regulations, increasing all types of interest rates on bank loans, including policy improvements in various sectors, and maintaining a prudent approach.

Economists have expressed their opinions in favour of a cautious monetary policy. They said controlling inflation should be a key focus of the upcoming monetary policy.

To achieve this, it is essential to maintain all types of policies, including policy improvements, and the policy interest rate should be increased. Until the target inflation rate is achieved, any restrictive measures taken by the Bangladesh Bank should be kept intact.

According to the Bangladesh Bank, the target was to reduce inflation to 8% by last December and to 6% by June 2024.

In December 2023, the overall inflation was 9.41%.

To curb inflation, the Bangladesh Bank has partially adopted a market-oriented approach in adjusting the interest rates.

Additionally, the policy interest rate has been increased to 11.89% from 9%.

Due to the dollar crisis, the Bangladesh Bank’s foreign currency reserves have decreased by almost half.

According to the accounting method of the International Monetary Fund (IMF), the net reserves are currently $20.18 billion, while gross reserves $25.43 billion.

On the other hand, due to weakness in supervision and lack of control in the banking sector, defaulted loans stood at Tk1,50,000 crore. Several financial institutions are unable to return money to customers.

In the first half (July-December) of the current financial year, the target of private sector credit growth was 10.9%. At the end of November 2022, the growth was 9.9%.

Dr Ahsan H Mansur, executive director of the Policy Research Institute, told the Daily Sun, “The primary objectives of monetary policy are to control inflation, stabilise the exchange rate, and gradually increase reserves. These three goals must be kept in mind when announcing the monetary policy. To achieve this, the upcoming monetary policy needs to be more restricted.”

Echoing with Mansur, Dr Zahid Hussain, former lead economist of the World Bank’s Dhaka office, said, “The contractionary monetary policy should be maintained in order to control inflation.”

Speaking with the Daily Sun, prominent economist and Agrani Bank Chairman Dr Zaid Bakht said, “A contractionary monetary policy is necessary to reduce the flow of loans. By increasing the interest rates on loans, people will be less inclined to borrow. This reduction in borrowing will lead to a decrease in the money supply, impacting the demand.”

“Private sector growth is already experiencing a decreased flow of loans. As interest rates rise, borrowing is further discouraged, resulting in reduced investments.”

“However, to control inflation, it is imperative to increase the interest rates, as people have already increased their cash holdings to sustain their standard of living amid high inflation. If inflation decreases, there will be a tendency to keep more money in banks,” he added.

According to the Bangladesh Bank, although the draft for the monetary policy has been prepared, the final decision will be made after considering the advice of the newly appointed finance minister.

The committee for the new monetary policy includes not only the governor but also prominent economists such as Dr Sadiq Ahmed, vice chairman of the Policy Research Institute; Binayak Sen, director general at the Bangladesh Institute of Development Studies and Masuda Yasmeen, professor and chairman of the Department of Economics at Dhaka University.