Bangladesh Bank has decided to withdraw the excess liquidity in banks from Monday.
The central bank’s decision is intended to create pressure on banks to come up with new investments.
The economists advised the central bank to withdraw the excess liquidity from banks in an effort to pressurise them to increase investment and control the inflation.
Now, the Bangladesh Bank is going to withdraw the excess liquidity from the market. But how much liquidity it will withdraw is not clear yet. “We will start withdrawing excess liquidity from Monday. After withdrawal of a portion, we will observe its impact on the market. Then next step will be taken,” BB spokesperson Md. Serajul Islam told the daily sun.
He, however, did not mention how much liquidity would be withdrawn in the first phase.
BB governor Fazle Kabir already hinted such withdrawal of such liquidity while announcing new monetary policy statement for the FY2021-22. He said, “If excess liquidity creates a bubble in the financial sector, Bangladesh Bank will lift it. The central bank will not hesitate to adopt a new policy if inflation or asset prices rise due to excess liquidity.”
BB wants to continue the policy of maintaining excess liquidity in the money market so that there is no shortage of cash to recover the economy from the impacts of COVID-19 pandemic.
“The central bank has to withdraw such excess liquidity through bills or bonds to create a demand of money for investment in the market,” he said.
Dr. Ahmed said the depositors would get more interest or profit if the money was invested in the productive sectors.
The reverse repo is the withdrawal of surplus money from commercial banks through treasury bills and bonds to control the money supply.
The repo is when a bank falls in financial crisis and takes loan from the central bank by depositing treasury bills and bonds. Asked about maintaining of liquidity in the currency market, BB executive director Habibur Rahman said the central bank had been pursuing a policy of maintaining liquidity since July last year to deal with pandemic shocks.
Although the banks have excess liquidity, the policy has been continued in the first quarter of this year (January-March).
He said there would be no change in the policy until the private sector's credit growth reached 10 percent.
The credit growth in the private sector has been steadily declining since September last year.
It fell to 8.32 percent in January this year, but the target for the second half of the last financial year is 11.5 percent.
The central bank unveiled the new monetary policy statement (MPS) laying emphasis on pushing the private credit growth to 11 percent by the end of December and 14.80 percent by the end of June in the FY2022.
Following the current stance of the expansionary fiscal policy of the government, especially for combating the COVID-19 fallout, the public and the private sectors’ credits are projected to grow annually by 32.6 percent and 14.80 percent respectively at the end of June 2022, said the new monetary policy statement.
According to the economists, the withdrawal of excess liquidity will be helpful for achieving the target.