Bangladesh Bank has increased the special repo rate by 1 percentage point in an effort to contain high inflation.

The central bank hiked the rate to 10.25 percent on Tuesday from 9.25 percent before, a BB official said.

The central bank usually increases the repo rate to contain inflation. This time, the central bank used the special repo rate as a monetary tool to avoid wrong signals to the stockmarket, said an official of a commercial bank.

The repo rate is the interest rate at which the central bank lends money to other banks. If any bank borrows from the central bank after 12 noon, it is called special repo rate, which means borrowing is expensive for primary dealer banks.

An International Monetary Fund team has recently asked the BB to raise the repo rate to around 11 percent as a condition for the possible $1 billion loan to Bangladesh. At present, the repo rate is 7.25 percent.

In more than one month, the central bank has not been lending to any bank through repo. It has been done through special repo, according to data from the central bank.

On two days -- December 20 and 21 -- the BB did not give any money via repo but lent about Tk 7,500 crore to the banks through special repo.

Inflation has been above 10 percent for the last one year. As a result, if any bank borrows from the central bank, the rate should be above the inflation rate, the BB official said.

The Daily Star/Bangladesh/ 23th Dec 2011