BB plans to cut policy rate, experts urge caution

The Bangladesh Bank plans to cut policy rate – a major shift from tight monetary policy after the appointment of new governor – aiming to reduce lending rate demanded by the business community.

Governor Md Mostaqur Rahman, who vowed to lower lending rates on his first day at office last week, has called a Monetary Policy Committee meeting for Wednesday, according to central bank sources.

The committee may propose a 50-basis-point cut to the policy rate from the existing 10%, as the new governor signalled on his first day in office, a senior Bangladesh Bank executive said.

However, economists and bankers said reducing rates while inflation remains elevated could reverse recent gains. They believe any cut should be limited and cautious if inflation is to be brought down.

Meanwhile, interest rates in the call money market and on all treasury bills and bonds fell below the 10% policy rate on Sunday, giving the central bank room to reduce the rate.

According to the Bangladesh Bank, the cut-off yields on 91-day, 182-day and 364-day treasury bills were 9.89%, 9.97% and 9.93% respectively, while the call money rate stood at 9.89% on Sunday.

The prospective shift in monetary policy comes as global energy markets face one of their gravest shocks in decades, following joint US and Israeli strikes on Iran and Tehran’s retaliatory missile attacks, which could worsen inflationary pressures.

The Bangladesh Bank maintained a tight monetary policy during the interim government’s tenure, raising the policy rate from 8.5% to 10% to contain inflation.

The latest monetary policy, announced by former governor Ahsan H Mansur just ahead of the February national election, kept the rate unchanged at 10% due to persistent inflation.

Under the tight stance, the central bank brought inflation down from double digits to single digits over the past year, although it remains above the desired level. The previous target was to reduce inflation to below 7%, but it is still above 8%.

According to Bangladesh Bank data, average inflation stood at 8.66% at the end of January, while lending rates ranged between 11% and 12%.

However, soon after taking office, Mostaqur Rahman, who is also a businessman, said he would prioritise reducing lending rates and supporting growth.

Speaking to The Business Standard, a senior central bank executive said inflation had not fallen to the expected level despite the tight policy.

He said the Bangladesh Bank is now considering easing its stance to support the supply side by injecting liquidity, arguing that increased production and supply could help ease inflationary pressures.

‘Infrastructure problems must be resolved first’

Mutual Trust Bank Managing Director Syed Mahbubur Rahman said bankers also want lending rates to fall, but prevailing market realities make that difficult.

“At present, the government is the largest borrower. When the government is borrowing at 10% or more through treasury bills and bonds, it is extremely difficult for banks to reduce lending rates,” he said.

He further explained that some banks are now offering up to 11% interest to mobilise deposits. “How can loans be offered at lower rates after borrowing at such high costs?” 

He added, “Many say high lending rates are a major obstacle to investment. We also agree high rates are a barrier, but they are not the only or principal one.”

He explained that when an investor decides to invest, the first considerations are gas, electricity and port facilities. “At present, shortages of gas, electricity and infrastructure are the main challenges for investment.”

He suggested that to boost investment, infrastructure problems must be resolved first and the issue of lowering lending rates can then be addressed.

He hoped the new governor would continue the ongoing reform initiatives in the banking sector. If a firm message is not delivered at the outset, vested interests may try to return the sector to its previous state. 

https://www.tbsnews.net/economy/banking/bb-plans-cut-policy-rate-experts-urge-caution-1374666