Bangladesh raises repo rate by 25 basis points to 6% in battle to tame inflation

The reverse repo rate was also raised to 4.25% as part of a policy stance to contain inflationary pressure

Published : 15 Jan 2023, 10:00 AM
Updated : 15 Jan 2023, 10:00 AM

Bangladesh Bank has raised its key interest rate, or repurchase agreement rate, by 25 basis points to 6 percent as part of its efforts to contain inflationary pressure.

The decision came on Sunday, three-and-a-half months after the previous hike on Sept 29, when it raised the repo rate by 25 basis points to 5.75 percent.

The repurchase agreement rate, also known as the overnight repo rate, is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds.

The reverse repo rate was also increased from 4 percent to 4.25 percent as part of a monetary policy stance the central bank called ‘cautiously accommodative’.

The special repo rate was raised by 25 basis points to 9 percent later in the afternoon. Habibur Rahman, the central bank’s chief economist, said the special rate was increased in adjustment to the repo rate. 

The near-term economic outlook seems quite stable, critically depending on three external issues:

  • The length and intensity of the Russia-Ukraine war.

  • The spree of interest hikes by the US Fed.

  • The re-emergence of the COVID-19 situation and its severity in China.

The policy stance aims to reduce pressure on inflation and the exchange rate, support economic growth and ensure the necessary flow of funds to productive and employment-generating activities, the central bank said.

The bank is also relaxing the lending rate cap for consumer credit, allowing it to vary up to 3 percent while removing the specific deposit floor rate. This is part of its plan to gradually move towards a market-based, flexible, and unified exchange rate regime within a 2 percent variation by the end of this fiscal year.

The central bank said that the near-term outlook for the economy “seems quite stable”, but depends largely on external issues such as the length and intensity of the Russia-Ukraine war, interest rate hikes by the US Federal Reserve, and the possible re-emergence of COVID-19 and its severity in China.

If these situations improve, they will expedite Bangladesh’s economic gains, it added.

Bangladesh does, however, have the resilience to remain insulated from adverse consequences of these issues, according to the central bank.

Central banks across the globe have been increasing lending rates to rein in inflation amid the Russia-Ukraine war.

Inflation has eased slowly in Bangladesh after a notable spike last year. The country posted an inflation rate of 8.71 percent in December after a 8.85 percent increase in the preceding month.

That means the Consumer Price Index fell for the fourth straight month after hitting 9.52 percent in August, the highest in a decade.

In a bid to overcome the external shocks, the central bank said it has already taken a series of policy initiatives, which include raising the policy interest rate, continuing the repo and liquidity support facilities for banks and non-banking financial institutions and extending refinancing facilities to neutralise a liquidity crunch.

Steps have also been taken to discourage imports of luxury and non-essential commodities, while enhancing facilities to improve export receipts and inward remittances, the bank said in its monetary policy statement.

“The domestic price level is likely to ease in the near future due to the recent declining global price level trend in almost all commodities, weathered by better yields of Aman and Boro paddies in the next two seasons."

It also expects the pressure on the exchange rate to normalise within the next few months on the back of the necessary policy measures taken by the government and the bank to curb the excessive import demand while enhancing the export receipts and inward remittances.

“Because of the vast liquidity withdrawal from the system, the liquidity condition in the money market is already very tight, reflected by sharply rising call money rates. Therefore, this MPS seeks various alternative options for curbing inflationary pressure.”

The central bank emphasises raising production and employment opportunities by providing necessary funds to various productive sectors of the economy. Its monetary policy also seeks to "promote import-substituting economic activities and dissuade imports of non-essential commodities to reduce the exchange rate pressure, protect foreign exchange reserves, and control imported inflation".

Toufique Imrose Khalidi
Editor-in-Chief and Publisher