Governor says Bangladesh Bank will remove lending rate cap ‘soon’

The cap on lending rates will “soon” be replaced with a market-based system, Bangladesh Bank Governor Abdur Rauf Talukder has said.

“The ceiling on lending rates will be lifted, allowing banks to set loan interest rates based on supply and demand without restrictions,” he said at a conference at a Dhaka hotel on Sunday.

He, however, did not specify any timeframe for the withdrawal of the cap.

Currently, the cap is based on Six months Moving Average Rate of Treasury Bill or SMART. The banks are allowed to charge customers 3 percentage points above the reference rate for loans. Based on calculations under the system, the ceiling is 13 percent now.

This system was introduced after Bangladesh agreed to a $4.7 billion loan programme of the International Monetary Fund. Before that, Bangladesh had a 9 percent interest ceiling on bank loans.

The governor’s comment came amid talks over the next tranche of the IMF loan.

He also said the central bank would introduce a crawling peg system to determine the exchange rate of foreign currencies against the taka as part of its efforts to move towards a market-based rate.

In macroeconomics, crawling peg is an exchange rate regime that allows currency depreciation or appreciation to happen gradually.