Bangladesh Bank raises policy interest rate by 50 basis points to 8.50%

Borrowing from the central bank becomes costlier for the commercial banks

বাংলাদেশ ব্যাংক।

The Bangladesh Bank has increased its key policy rate by 50 basis points to 8.50 percent in line with its contractionary monetary policy.

The decision by the central bank on Wednesday means short-term loans taken by commercial banks from the central bank will become more costly.

The rate had been increased for the last time in January by 25 basis points to make borrowing more expensive for banks as part of a 'cautious and accommodative' monetary policy for the second half of the current fiscal year.

It will take time to understand the effects of the latest decision as it came when the central bank is all set to remove the reference rate for bank loans.

The central bank has also made adjustments to its interest rate corridor as part of its contractionary monetary policy.

The special repo rate (Standing Lending Facility, or SLF), which is the ceiling of the interest rate corridor, has been raised by 50 basis points to 10 percent.

Meanwhile, the reverse repo rate (Standing Deposit Facility, or SDF) has been raised by 50 basis points to 7 percent.

As a result, the spread between the upper and lower limits of the benchmark interest rate corridor has been kept unchanged at 150 basis points.

This means that the SLF interest will now be determined by adding a maximum of 150 basis points to the policy rate of 8.5 percent. Similarly, 150 basis points will be subtracted from the policy rate to fix the SDF interest rate.

In practical terms, when commercial banks borrow from the central bank to meet their liquidity needs, the interest rate is set through the repo rate. Conversely, through the reverse repo process, banks park their excess funds with the central bank.

The interest rate at which the central bank extends long-term loans to commercial banks is known as the bank rate. The bank rate, which currently stands at 4 percent, has not been altered.