Central bank to return to mkt-based interest rate from July

Staff Reporter :
Bangladesh Bank (BB) is set to announce a new monetary policy this month which will prioritize the market-based interest rate and single exchange rate of US dollar aiming to curb inflationary pressure and bring stability to the macroeconomic sector.

The new monetary policy (July-December) will align with the government’s medium-term reform policy, said an official of the central bank who is involved in its formulation, wishing not to be named.

The government has set a five-point reform target to get benefits in the medium term in the macroeconomic sector by overcoming the dollar crisis and strengthening the forex reserves of the country.

These included introducing market-based interest rates on bank loans and the single currency exchange rate as per market demand rather than the current multiple rate system.

The amount of subsidy will be reduced gradually, and the cost of government borrowing reduced in phases, along with cutting the volume of loans from savings bonds.

The government is also trying to ensure good governance in the financial sector by amending the Bank Company Act and Financial Act.
Implementation of the new reform policies will start through the next monetary policy, said officials of the finance division, a wing of the finance ministry.

On BB’s return to market-based interest rate from July, Dr. M Abu Eusuf, Professor and former Chairman, Development Studies, Dhaka University told to The New Nation that it is required to back the market-based interest rate replacing the interest-cap as the present rate of inflation is increasing at a significant pace.

“As the current rate of inflation is near to touch the double-digit mark, the market-based interest rate will make money more costly to borrow which eventually curb the domestic consumption,” he said.

Regarding introducing a unified exchange rate, Professor M Abu Eusuf, who is also the Executive Director, Research and Policy Integration for Development (RAPID), said unified exchange rate (within a 2.00 percent variation) is a must to restore exchange rate discipline.

The contemporary forex market is volatile in nature, which propels further instability in the entire market structure, he added.

Apart from these, Professor Eusuf also said that the monetary policy alone can’t make a big shift to curb the inflation or macroeconomic stability. However, integrated measures through fiscal policy and market monitoring are also required.