Bangladesh raises repo rate by 50 basis points, the second hike in a month, to rein in inflation

The central bank has raised its key interest rate, or repurchase agreement rate, by 50 basis points to 5.50 percent as part of its efforts to control consumer prices.

News Deskbdnews24.com
Published : 30 June 2022, 10:32 AM
Updated : 30 June 2022, 02:59 PM

Thursday’s rate hike is the second in a month. On May 29, Bangladesh Bank raised the key interest rate by 25 basis points to 5 percent, the first increase in a decade.

The repurchase agreement rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds.

The decision was taken to “deal with the demand side pressures along with ensuring the required flow of funds to the priority and productive sectors to promote supply-side activities", the central bank said in its monetary policy statement for the year starting Jul 1.

In May, consumer prices soared to an eight-year high, with headline inflation rising to 7.42 percent, up from 4.87 percent a year earlier, according to the Bangladesh Bureau of Statistics. The food inflation rate accelerated 8.3 percent.

“Monetary and credit programmes for FY23 will pursue a cautious policy stance with a tightening bias to contain inflation and exchange rate pressures while supporting the economic recovery process, ensuring the necessary flow of funds to the economy’s productive and employment generating activities for long-term economic growth,” the central bank said.

Noting that the major economies have raised their policy interest rates recently in a bid to tackle soaring inflation, Bangladesh’s central bank said the continuation of rising trends of long-term interest rates in advanced economies may create some pressures on interest and exchange rates in the emerging market and developing economies

INFLATION TRAJECTORY WILL CONTINUE

The central bank also noted that the Russia-Ukraine war, humanitarian crisis, and subsequent sanctions on Russia weakened global economic recovery prospects.

Moreover, soaring shipping costs, mainly because of elevated freight demand during the recovery period, added inflationary pressure to imported commodities. New bottlenecks in global supply chains emerged due to restrictions on some manufacturing areas in China following their zero COVID policy, further intensifying the existing price pressure.

Hence, global headline inflation is expected to remain elevated for longer than the period predicted in the previous forecasts of the International Monetary Fund.

The Bangladesh economy is also facing adverse consequences of hiking global food and fuel prices through the import channels, the central bank said.

The trends of international food and non-food commodity price indices illustrate that the price surge in the recent months has already been passed through domestic prices in Bangladesh, mirrored in the sharp rise of import payments, particularly since the second quarter of the 2021-22 fiscal year.

"If this situation continues in the upcoming months, persistent depreciation pressures on the Bangladesh taka will continue to push up domestic inflation further," Bangladesh Bank warned.

However, it added, the upward trend in global energy prices might remain unresponsive to domestic inflation due to administered prices in the country.

For Bangladesh, the central bank's modelling shows that a higher inflation trajectory will continue in FY23.

Therefore, Bangladesh Bank claimed, the monetary policy emphasises containing inflationary pressure while supporting investment and employment-generating activities.

"The monetary policy for FY23 intends to discourage unproductive financial flows to tame the demand-side pressures without circumventing the required flow of funds to the productive sectors easing supply-side conditions and supporting the country's long-term growth aspirations."

The monetary and credit programmes for FY23 are designed to ensure adequate money and credit flows to support 7.50 percent GDP growth while keeping inflation within the desired level -- 5.6 percent.

The Bangladesh economy has shown strong resilience against COVID-19 shocks and recovered the growth rate quickly in FY21 and FY22. Bangladesh ranked 5th out of 121 countries in the Nikkei Covid-19 Recovery Index (as of 30 April 2022), while the country secured the top position among the South Asian countries.

Considering the economic impact of the Padma Bridge, 7.50 percent economic growth target seems consistent with the central bank’s model-based GDP growth forecasts for FY23, according to the monetary policy statement.

MODERATE BOP DEFICIT

Due to the widening of the trade deficit amid relatively moderate inflows of inward remittances, the current account deficit expanded to $15.3 billion, or 3.3 percent of GDP, during July-April of FY22.

Despite relatively improved financial account balance, the overall balance of payments, or BoP, has witnessed a deficit of $3.7 billion in the July-April period, compared to a surplus of $7.5 billion a year earlier.

Based on the latest trend of available data, the Bangladesh Bank said, it is anticipated that the current account deficit might remain in the negative territory by around $16.5 billion at the end of FY23.

However, the increased outflow of wage earner remitters amid improved economic and working conditions in the source countries on top of the base effect is expected to help the inward remittances grow by 15 percent in FY23, the central bank said.

It said exports and imports growth will also be moderated by the higher base effect, reaching 13 percent and 12 percent growth in the new fiscal year, respectively.

"As a result, the overall balance (BoP) in FY23 is anticipated to be at a moderate deficit level, well supported by a befitting performance of the financial account."

Toufique Imrose Khalidi
Editor-in-Chief and Publisher