❖ Monetary Policy Of Bangladesh Bank (FY,Half-Year 2024, January -

June)
Monetary policy refers to the actions and strategies a central bank, such as
Bangladesh Bank, uses to control the money supply and influence a country's
economic health. The main goals are to promote stable prices, control
inflation, encourage employment, and support economic growth. Central
banks adjust monetary policy by changing interest rates, controlling inflation,
and regulating money supply and credit conditions.

Summary Of The Monetary Policy, 2024

The latest monetary policy by Bangladesh Bank, announced on October 22,
2024, aims to tackle persistently high inflation, especially in food prices. The
policy focuses on tightening financial conditions by adjusting key interest
rates and the policy corridor. Here’s a summary with an explanation of each
point:
1. Increase in Repo Rate

• The central bank raised the repo rate by 50 basis points to 10%,
effective October 27, 2024. This is the highest level seen in recent years
and represents the third rate hike since August 2024.
• Objective: By increasing the cost of borrowing, Bangladesh Bank hopes
to reduce consumer demand, especially for goods whose prices are
inflation-sensitive, thus helping to slow down the inflation rate. Higher
borrowing costs discourage excessive spending, potentially reducing
price pressures in the economy.

2.Policy Corridor Adjustment

• The central bank adjusted the policy interest corridor to limit liquidity
further. The Standing Lending Facility (SLF) rate was raised to 11.5%,
and the Standing Deposit Facility (SDF) rate was increased to 8.5%.
• Objective: These changes aim to set boundaries for the market interest
rates, keeping them within the defined range to manage liquidity better.
 Higher SLF rates mean that banks needing emergency funds from the
central bank will have to pay more, discouraging excessive liquidity in
the system. Conversely, the increased SDF rate incentivizes banks to
deposit excess reserves with the central bank.

3. Inflation Control

• With inflation nearing double digits and food inflation persistently high,
this policy aims to mitigate demand-driven inflation, even though much
of Bangladesh's current inflation stems from supply-side factors.
• Challenge: Since the primary drivers of inflation are supply-side
factors—such as disruptions in supply chains, rising global commodity
prices, and higher import costs—the policy's effectiveness might be
limited without complementary structural reforms. Therefore, this
monetary policy is one of several measures needed to manage inflation
sustainability.

4.Future Policy Stance

• Bangladesh Bank has indicated a continued contractionary policy

stance until inflation trends downward. However, given the complexity
of the inflation drivers, it is uncertain how quickly inflation will respond
solely to monetary measures.
• Expectation: While the monetary tightening will help reduce demand-
driven inflation, additional fiscal and structural policies may be
necessary to address core supply-related inflation issues more directly.

In essence, this latest policy underscores Bangladesh Bank's focus on

inflation control through monetary tightening while highlighting the broader
economic challenges the country faces. As inflation remains high, future
policy adjustments will likely depend on both inflation outcomes and external
economic factors.
 ➢ Significant Changes Compare To The Last Monetary Policy.
➢ Monetary Policy, 2024

The Bangladesh Bank's latest monetary policy for the second half of FY2024,
released in January, is heavily focused on curbing inflation, which has remained
high due to supply chain disruptions, global economic volatility, and local currency
depreciation. This policy marks a continuation of Bangladesh Bank's "hawkish"
approach, with the following key measures:

1. Increased Policy Rate: Bangladesh Bank raised its policy rate by 25 basis
points to 8%, aiming to reduce inflation by making borrowing costlier. This
is the eighth consecutive rate hike since May 2022, reflecting the Bank’s
commitment to stabilizing prices, although some analysts believe a larger
hike may have been more effective in achieving rapid disinflation.
2. Credit Growth Limitation: The private sector credit growth target was
lowered from 11% to 10%, aiming to dampen demand and decrease
inflationary pressures. This reduction is expected to limit liquidity and
encourage banks to be more selective in their lending practices.
3. Inflation Target: The inflation target has been adjusted to 7.5% by June
2024. However, this target remains ambitious given the current 12-month
average inflation of around 9.5%. The policy includes supply-side
interventions to support key productive sectors, although experts question
the adequacy of these measures in the face of persistent cost-push inflation.
4. Exchange Rate Strategy: To stabilize the Bangladeshi taka, Bangladesh
Bank is moving towards a "crawling peg" exchange rate system, allowing
for controlled adjustments based on a basket of currencies. This gradual shift
aims to reduce exchange rate volatility and ease import-related inflation
pressures.
5. Liquidity Management: Tight liquidity conditions in the banking sector
have led to increased call money rates, with Bangladesh Bank continuing its
support for banks through repo facilities, liquidity support for Islamic banks,
and refinance programs targeting sectors like agriculture and SMEs.
6. Foreign Exchange Reserves: With reserves covering approximately five
months of imports, the Bank aims to stabilize the currency and ease foreign
exchange pressures. The policy acknowledges that the current reserve level
is affected by frequent interventions to meet foreign exchange demands.
These measures underscore Bangladesh Bank’s commitment to controlling
inflation, though some experts suggest that stronger or more direct actions could be
needed for faster results. The monetary policy reflects a careful balance between
curbing inflation and supporting economic growth, with a conservative GDP
growth forecast of 6.5% for FY2024 given the current economic headwinds.

For more details, see Bangladesh Bank's official release and analysis from sources
such as The Daily Star and BRAC EPL Research.

➢ Monetary Policy, 2023

The Bangladesh Bank’s monetary policy for 2023 focused on curbing inflation,
supporting economic growth, and stabilizing the financial sector amid persistent
challenges. Here are key points:

1. Policy Rate Increase: To tackle inflation, which has been over 9% since
early 2023, the central bank adopted a contractionary stance, raising the
policy (repo) rate multiple times, reaching 7.75% by mid-year. This made
borrowing costlier, aiming to reduce money supply and control demand-
driven inflation.
2. SMART Interest Rate Framework: The bank introduced the Six-Month
Average Rate of Treasury bills (SMART), replacing the fixed lending rate
cap of 9%. This new framework allows more flexibility in interest rates,
enabling banks to set competitive lending rates based on market conditions,
thereby aiming to reduce inflationary pressures.
3. Credit Growth: Bangladesh Bank lowered the private sector credit growth
target to 10% from 11% to manage liquidity and limit excessive borrowing.
This adjustment aligns with the overall strategy of reducing economic
overheating.
4. Addressing Foreign Exchange and Liquidity: With foreign exchange
reserves under pressure, the policy included measures to reduce dollar
outflows. The bank maintained tighter controls on import financing and
allowed a managed float of the Bangladeshi taka, attempting to balance
exchange rates and support the reserve level.
5. Non-Performing Loans (NPLs): A modest improvement in the NPL ratio
was observed, particularly in state-owned banks. However, the central bank
 aims for further improvements through policy incentives to reduce default
risks in the banking sector.
6. Capital Market and Fiscal Measures: Bangladesh Bank collaborated with
the Bangladesh Securities and Exchange Commission to improve capital
market performance and investor confidence. Fiscal austerity, including
reduced government spending and efficient revenue collection, contributed
to a budget surplus, helping mitigate inflation and financial instability.

This policy marks a cautious approach as the Bangladesh Bank prioritizes inflation
control while also considering long-term growth and financial stability amid global
and domestic pressures.

Here's a comparison table highlighting significant changes between

Bangladesh Bank’s monetary policies in 2023 and 2024

1.Policy Aspect

Monetary policy 2023:

Accommodative to support growth with a moderate tightening approach.

Monetary policy 2024.

Contractionary stance to curb inflation with further rate hikes expected

2.Repo Rate :

2023. The repo rate was raised gradually to 7.75% to curb inflation and limit
money supply.
2024: Repo rate further increased to 8%, maintaining a contractionary stance
to manage inflation.

3.Credit Growth
2023: Private sector credit growth target was around 11% to encourage
investment.

2024: Private sector credit growth target reduced to 10% to better control
liquidity pressures.

4.Lending Rate Cap

2023: Introduced the SMART-based rate, lifting the prior 9% cap on lending
rates.

2024: SMART formula continued, setting rates based on market conditions to

allow flexible lending.

5. Exchange Rate
2023: Move towards a market-driven exchange rate was initiated to stabilize
currency value.
2024: Continued shift to market-driven exchange, with no discounted USD
sales to banks from July.

6.Public Sector Borrowing

2023: Focused on balancing public borrowing to avoid crowding out private
investment.

2024: Increased public borrowing target (27.8%) while attempting to maintain

liquidity for growth.

7.Inflation Target
2023: Targeted inflation at 6%, but actual rates exceeded 8% due to cost-push
pressures.

2024: Inflation target remains at 6%, though maintaining this target is

considered challenging.
8.Liquidity Support
2023: Special support for Islamic banks and CMSME sectors to ease liquidity
stress.

2024: Continued liquidity support for crucial sectors with additional repo and
refinance facilities.

These changes reflect Bangladesh Bank's dual focus on inflation control and
exchange rate stability while trying to ensure liquidity for priority sectors,
especially under economic pressures like high import costs and persistent
inflation.

➢ The Tools Used By Bangladesh Bank.

Bangladesh Bank (BB) uses a range of monetary policy tools to manage economic
conditions, control inflation, stabilize the currency, and promote growth. Here are
some key tools BB employs:

1. Interest Rate Adjustments

• Repo Rate: BB sets the repo rate (rate at which banks borrow from the
central bank), which influences overall lending rates in the economy. In
recent policies, BB increased the repo rate to curb inflation by making
borrowing more expensive

SMART Formula: The Six-Month Moving Average Rate of Treasury bills

(SMART) was
introduced to set flexible lending rates based on market conditions,
moving away from
the previous 9% cap.
2. Credit Growth Management

• BB sets credit growth targets for both the public and private sectors to
control liquidity. In 2024, the target for private sector credit growth was
 reduced to 10% to prevent excess liquidity from fueling inflation while
supporting essential sectors like SMEs and CMSMEs (Cottage, Micro,
Small, and Medium Enterprises)

3. Open Market Operations (OMO)

• Repo and Reverse Repo Operations: These are used to control

liquidity by lending to or borrowing from commercial banks. Regular
repo and reverse repo operations help maintain liquidity levels aligned
with policy objectives.
• Treasury Bills and Bonds: BB issues and sells government securities to
the market to absorb or inject liquidity as required

4. Foreign Exchange Interventions

• Market-Driven Exchange Rate: Bangladesh Bank has gradually moved

towards a market-driven exchange rate system to stabilize the
Bangladeshi Taka (BDT) and reduce volatility in foreign exchange rates.
• FX Reserves Management: BB also engages in buying or selling foreign
currency to stabilize reserves and manage exchange rate pressures

5.Liquidity Support Programs

• Refinancing Schemes: BB provides refinancing facilities for priority

sectors, including agriculture, small and medium enterprises (SMEs),
and export-oriented industries, to ensure these sectors can access
affordable credit.
• Islamic Banking Support: Specialized liquidity support tools like
Mudarabah Liquidity Support (MLS) for Shariah-compliant banks help
maintain liquidity in Islamic finance sectors

6.Inflation Targeting and Supply-Side Interventions

• BB targets inflation by adjusting interest rates and directing credit flow

towards productive sectors to alleviate supply-side pressures. The
central bank has also coordinated with government agencies to ease
price pressures on key commodities.
7.Reserve Requirement:

This includes the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR). The CRR is set at 4.0% as of recent adjustments, meaning banks must
maintain 4% of their total deposits in cash reserves with Bangladesh Bank.
SLR, which includes liquid assets like cash, gold, and approved securities, is
set at 13% for conventional banks and 5.5% for Islamic banks. These
requirements help control liquidity by limiting the amount of funds available
for lendingThese tools help Bangladesh Bank address inflationary pressures,
currency stability, and economic growth, though balancing them remains
challenging due to external factors like global commodity prices and import
costs.

8.Bank Rate:

The bank rate, also known as the repo rate, currently stands at 8%, increased
by 25 basis points in early 2024. This rate determines the cost for commercial
banks borrowing from Bangladesh Bank, thus impacting overall market
interest rates and influencing money supply

9.Liquidity Facilities:

Bangladesh Bank provides liquidity support via tools like the Standing
Lending Facility (SLF) and Standing Deposit Facility (SDF). The SLF rate,
slightly lowered to 9.5%, offers banks access to emergency funds. Conversely,
the SDF rate was raised to 6.5%, making it more attractive for banks to deposit
excess funds, thus helping manage liquidity more effectively in the banking
system.
The Policy Reforms Need For Better Economic System.

1.Flexible Interest Rate Targeting

2 Exchange Rate Policy Reform and Controlling

3.Strengthen The Inflation Targeting Framework

4.Refine Open Market Operation

5.Macroprudential Policy Framework

6.Digital Currency and Payment System

7. Developing a Yield curve for Government Securities