Bangladesh Bank (BB) has brought a structural change in its monetary policy framework making money expensive by hiking policy rates.
The central bank has declared a contractionary monetary policy for the second half of FY24, emphasising reduced money flow to the private sector and revising the credit growth projection to 10%, down from the initial target of 11% in the first half of the FY.

It also raised the benchmark policy rate by 25 basis points to 8%.
The new monetary policy was unveiled by BB Governor Abdur Rouf Talukder during a press conference held at BB headquarters in the capital on Wednesday while the central bank’s chief economist Md Habibur Rahman made a presentation on it.

The Bangladesh Bank's monetary policy statement (MPS) in effect since 1 January.
In the MPS four main four challenges have been identified. These include policy rate hikes, standing deposit facility increased, to adopt crawling peg to curb exchange rate volatility and to ensure good governance and control NPLs time bound road map.

According to MPS revised the projection for inflation upwards to 7.5% from 6% as consumer prices persistently stayed high.
In the first half (July-December) the target was to reduce inflation to 8% by last December and 6% by June.In December 2023, the overall inflation was 9.41%.
GDP growth target also down to 6.5% from the initial 7.5% for 2023-24 fiscal year to considering the ongoing challenges in the economy.
It also plans to tighten credit flow to the private sector and has projected a lower private sector credit growth at 10% in FY24, compared to 11% in the fast half of current fiscal year.  At the end of November 2023, the growth was 9.9%.

The projected growth in public sector credit is 27.8%, down from 31% set for the current financial year earlier.
Considering these growth rates in both the public and private sectors, domestic credit growth is projected to grow by 13.9% by the end of June 2024.
According to the Bangladesh Bank, to bring down the runaway inflation, in the MPS BB has decided to increase its policy rate (the repo rate) by 0.25 basis points to 8% from 7.75%.
Additionally, to refine liquidity management, the Standing Lending Facility (SLF) rate has been reduced by 25 basis points to 9.50%.

The Standing Deposit Facility (SDF) rate has been increased by 75 basis points to 6.50%.
BB said in MPS, due to the policy rate hike, the interest rates of all kinds are expected to rise further. This will also increase in deposit and loan interest rates.
Customers may be encouraged to keep more deposits in banks due to higher deposit interest rates. The increase in loan interest rates may reduce the demand for loans in productive sectors, potentially increasing liquidity flow.

The central bank also said it is contemplating the implementation of a crawling peg system to regulate unusual fluctuations in the currency’s value.
In MPS BB said that, this strategy is aimed at tempering unusual fluctuations in the currency’s value.
The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates.
The method fully uses the key attributes of the fixed exchange regime, as well as the flexibility of the floating exchange rate regime.

To address the challenges of MPS, BB Governor Abdur Rouf Talukder said that the central bank has undertaken several policy initiatives focused on controlling inflation, improving the current account balance, managing exchange rate instability and keeping adequate foreign exchange reserves, stabilizing the financial sector, and strengthening the capital market.
However, he saidrising inflation and sustained exchange rate pressures continue to pose significant challenges for Bangladesh economy.
“Containing inflation will be the first and foremost objective of this MPS. How much Growth that is not headache now. Inflation reduce is main target. To control inflation BB will take any other steps. Contractionary monetary policy will continue until inflation reaches 6%. It won’t be a problem if the growth rate is reduced by 1%.”