Bangladesh raises interest rate on short-term trade financing in foreign currency

It comes nearly one and a half months after the central bank lowered the rate to help exporters borrow money from banks

Banks can now charge a maximum interest rate of SOFR plus 3.5 percent again on short-term trade financing in foreign currency as Bangladesh Bank has raised the rate by 50 basis points.

The central bank announced the new interest rate on Wednesday, nearly one and a half months after lowering it to help exporters, particularly those from the garment sector, borrow money from banks.

Bangladesh Bank said it changed the all-in-cost ceiling in line with "global trends".

In the previous notice lowering the rate, the central bank said: “Given the global market trends, it has been decided to set all-in-cost ceiling per annum with a markup of 3 percent over benchmark rate applicable to the relevant currency against short term permissible trade finance."

“Authorised dealers may continue to arrange finance with LIBOR as benchmark rate [as long as it is in effect].”

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

The US Federal Reserve last week raised its target interest rate by three-quarters of a percentage point to a range of 3.00 percent to 3.25 percent and signalled more large increases to come in new projections showing its policy rate rising to 4.40 percent by the end of this year before topping out at 4.60 percent in 2023 to battle continued strong inflation.

The Bank of England also raised its key interest rate to 2.25 percent from 1.75 percent last week and said it would continue to "respond forcefully, as necessary" to inflation, despite the economy entering recession.

The big rate jumps have badly affected the developing economies in Asia.

As part of measures to ease the pressure, Bangladesh Bank has now raised the rate on loans in foreign currency, but Governor Abdur Rauf Talukder last month insisted they have no plans to remove the 9 percent ceiling on the lending rate in the local currency, which has lost much of its value against the dollar in the past few months.

On Wednesday, Secured Overnight Financing Rate or SOFR was 1.4 percent. If the rate remains the same, the banks will be able to charge a maximum of 4.9 percent interest on short-term foreign currency investment.

Bangladesh Bank said Euro Interbank Offered Rate or EURIBOR and Sterling Overnight Index Average or SONIA will be the reference rates for loans in euros and pounds respectively.

The central bank had earlier set an annual interest rate ceiling for foreign deposits along with benchmark reference rate in the relevant currency.