The Bangladesh Bank has again responded to the rising inflation by tightening its monetary policy, raising the policy rate by 50 basis points to 9%.

This move, however, is expected to increase all types of interest rates, leading to higher borrowing costs for businesses.

Experts warn that this could force businesses to raise prices of consumer goods due to the additional borrowing costs.
While some business leaders express concern, noting that the policy rate hike may stifle fresh ventures and exacerbate existing pressures, others have welcomed the decision.
Another group believes that proper implementation of the policy rate could help curb inflation in the long spell.

On Monday, the banking regulator hiked the policy rate or repo rate by 50 basis points to 9% to combat the soaring inflation, effective from 27 August (today).
Different countries choose the formula of raising bank interest rates to control inflation, which has yielded good results for them. Bangladesh has also been doing the same since July last year.

Shams Mahmud, president of the Bangladesh Thai Chamber of Commerce and Industry, told the Daily Sun that although businesses are currently under significant pressure, the interest rate hike could curb inflation in the long run, aiding economic recovery.

“If inflation goes down in the next six months, then business expenses will decrease. Then we can recover the losses,” he added.
Rizwan Rahman, former president of the Dhaka Chamber of Commerce and Industry (DCCI), however, highlighted the challenges the businesses are now facing due to higher interest rates, including soaring raw material and labour costs.

“The rising interest rates, now at 14–15%, compared to the 8–9% at which many initially borrowed, are placing businesses at significant risk,” he added.

Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, advocated for the rate hike, terming it as a necessary measure to tame inflation.

“Although the increased lending costs might negatively impact investment and employment, the central bank had little alternative but to take this step to rein in the escalating inflation,” he added.
He further stated, “The rate hike is expected to tighten liquidity, making borrowing more expensive for both businesses and consumers.”

According to the Bangladesh Bureau of Statistics (BBS), Bangladesh’s monthly inflation surged to a 13-year high of 11.66% in July 2024, up from 9.72% the month before. This marks the highest inflation rate since September 2011, when it reached 10.97%.

Food inflation reached a record high of 14.10% in July 2024, up from 10.65% in June, while non-food inflation increased slightly to 9.68% from 9.15%.
To control inflation, the Bangladesh Bank started setting banks’ final lending rates using the six-month moving average rate of treasury Bill (SMART rate) in July last year.
Since the implementation of the SMART rate, loan interest rates have steadily increased. However, experts warn that the subsequent rise in loan interest rates, now exceeding 13%, poses significant risks to businesses.

According to the central bank data, the lending rate in the banking sector crossed 13.55% in April this year.
In May, the regulator scrapped the SMART rate formula after about a year and returned to a market-driven system after four years.
As a result, banks now have the authority to determine their lending rates, which will be based on bank-client relationships, loan demand, and the supply of loanable funds.
Consequently, interest rates on all types of loans are expected to increase in the near term.

Additionally, the central bank on Sunday decided to increase the policy rate – the rate at which financial institutions borrow money from the central bank – from 8.5% to 9% to curb inflation.
The primary objective of increasing the policy rate is to control inflation by reducing the money supply in the market.

When the central bank perceives that an excessive money supply is driving inflation, it raises the policy interest rate to limit money flow.
A higher policy interest rate means banks will have to pay more to borrow from the central bank, leading to higher interest rates on loans provided by commercial banks. This, in turn, discourages commercial banks from borrowing from the central bank.

The Bangladesh Bank raised the policy rate several times since May 2022 to make money more expensive. In October last year, the central bank increased its key policy rate by 50 basis points to 7.75%, the largest hike in a decade.
In January this year, the policy rate was raised by another 25 basis points to 8%, and again in May by 50 basis points to 8.5%.