Rate unchanged amid high inflation risk

Rising fiscal pressures from the new national pay scale and fresh cost shocks from higher fuel prices are clouding Bangladesh’s inflation outlook, prompting Bangladesh Bank to keep its policy rate unchanged at 9.5 per cent for the October-December quarter despite headline inflation falling to a 10-month low.

In its first-ever Quarterly Monetary Policy Statement (QMPS), announced yesterday, the central bank said the partial implementation of the new pay scale could add to both inflationary and fiscal pressures, while the recent fuel price increase was likely to raise transport and production costs.

“The recent increase in administered fuel prices is likely to raise transport and production costs, while partial implementation of the national pay scale could add further inflationary and fiscal pressures,” Bangladesh Bank said.

Headline inflation eased to 8.26 per cent in August from 9.16 per cent in June. Food inflation stood at 7.02 per cent, while non-food inflation remained elevated at 9.32 per cent, indicating continued pressure on consumer prices.

The Tk20-per-litre increase in fuel prices earlier this month is expected to push up freight, transport and energy costs for manufacturers, farmers and logistics operators, potentially feeding through to wider consumer prices.

Bangladesh Bank also cited volatile global energy prices, the prolonged Middle East conflict and disruptions in the Strait of Hormuz as risks to the inflation outlook. It warned that premature monetary easing could raise inflation expectations and delay the return of inflation to the target range.

The decision was taken at the 14th meeting of the Monetary Policy Committee on 23 September and announced by Deputy Governor Habibur Rahman on Wednesday.

The Standing Lending Facility (SLF) remains at 11 per cent and the Standing Deposit Facility (SDF) at 7.5 per cent. The SLF is the rate at which banks borrow overnight from Bangladesh Bank, while the SDF is the rate paid on banks’ excess funds deposited with the central bank.

The latest decision marks a shift from the previous six-month monetary policy cycle to a quarterly framework, allowing the central bank to review its stance more frequently.

Bangladesh Bank estimated real GDP growth at 4.14 per cent in FY2025-26, with third-quarter growth at 2.2 per cent. Industrial production contracted 0.28 per cent during the period.

High financing costs, energy shortages, infrastructure constraints and uncertainty over domestic and external demand continue to weigh on economic activity.

A Tk60,000 crore stimulus package, including Tk20,000 crore to reopen closed factories, is expected to support recovery. But the central bank cautioned that “monetary policy alone cannot address the supply-side constraints weighing on growth”.

“The central policy challenge is to support economic activity without compromising the disinflation process,” it said.

Private-sector credit growth stood at 4.75 per cent in August, reflecting weak investment and lending demand, borrower risks and weaknesses in the banking sector.

Despite the 50-basis-point policy rate cut in August, credit transmission to the real economy “remains weak”. Liquidity conditions have improved in interbank and government securities markets, but this has yet to translate into stronger business lending.

The banking sector’s non-performing loan ratio rose to 32.78 per cent in June. Bangladesh Bank stressed the need for “bank restructuring, stronger governance, capital restoration, and improved credit discipline”.

The balance of payments recorded a $6.6 billion surplus in FY2025-26, although the overall balance turned negative in the first two months of FY2026-27, mainly because of a financial account deficit.

Remittances rose 18.90 per cent during the period, providing support to the external sector, while relative exchange-rate stability helped contain imported inflation.

Bangladesh Bank expects a gradual recovery in the coming fiscal year. The World Bank forecasts 4.6 per cent growth for FY2026-27, while the IMF has cut its forecast to 3.5 per cent from 4.3 per cent.

The central bank expects inflation to ease gradually, but said the pace of disinflation remains uncertain.