Bangladesh Bank Governor Atiur Rahman and his colleagues pose with the copies of Monetary Policy Statement at the central bank headquarters in Dhaka yesterday.

Bangladesh Bank for the first time in three years has cut all repo rates by 50 basis points, which will help commercial banks get money from the central bank at a cheaper rate.

The move signals an expansion of credit flow aimed at accelerating investment and achieving higher economic growth.

An expanded monetary base backed by higher remittance growth has created scope to fuel growth and contain inflation simultaneously.

BB Governor Atiur Rahman yesterday released the Monetary Policy Statement (MPS) for the second half of the current fiscal year and made the announcement of slashing the repo rates.

After the announcement of the MPS, the central bank issued a notice where the repurchase rate (repo) was lowered to 7.25 percent and reverse repo rate to 5.25 percent. Special repo rate was cut to 10.25 percent.

The rate at which the BB lends money to commercial banks is called repo rate, while reverse repo rate is the rate at which the BB borrows from the banks. The special rate is applicable for emergency borrowing from the central bank.

The new rates will come into effect from today. In the fourth quarter of 2009, repo rate was lowered and since then it continued to rise.

Before the yesterday's cut, the BB had raised the repurchase rate by 325 basis points in total since August 2010, mainly to contain inflation.

“In view of the risks to output growth due to the uncertainties around the global economy, BB will reduce all repo rates by 50 basis points effective immediately,” the MPS said.

The monetary policy stance for January to June seeks to bolster investment in productive industries, avert asset bubbles, damp inflation and minimise excessive currency swings, it said.

The BB has also revised its monetary programme with a broad money growth target of 17.7 percent in June 2013 compared to the MPS target of 16.5 percent in the first half of fiscal 2013.

The central bank also targets a new private sector growth envelope of 18.5 percent in June 2013 compared with the original programme of 18 percent.

The governor said they encourage banks to use the space for private sector growth for productive, not speculative, purposes.

This 'balanced' monetary policy will also aim to minimise excessive volatility of the exchange rate, he said.

Rahman also said these objectives involve tradeoffs, and the balance between BB's instruments and its targets will be reviewed regularly.

Allah Malik Kazemi, a senior consultant of the central bank, said the monetary policy is being described as 'balanced' because adequate measures have been taken to combat the risks created by the credit expansion.

Kazemi also said the aim of the monetary policy is to create a conducive environment for achieving the target for economic growth set by the government.

BB Chief Economist Hassan Zaman said, “Declining inflation has created the space for the repo rate reduction which should have an impact on lending rates and stimulate more growth-enhancing investments."

At the same time, the BB is mindful of inflation risks and has calibrated the rate cut accordingly, keeping in mind this inflation-growth balance, he said.

BB Deputy Governor SK Sur Chowdhury said the liquidity of the banks will increase and they will cut the interest rate on loans.

He said the banks have already started lowering the interest rate on credit and it will go down further.

The economy will expand more than 6 percent in the fiscal year, in line with the 10-year average, though growth may fall short of the government's 7.2 percent target, the BB said.

The goal of an average inflation rate of 7.5 percent “appears achievable, though risks remain,” such as energy and food prices, it said.

Consumer-price growth was 7.69 percent in December 2012, moderating from almost 12 percent in September 2011.

The MPS said financial sector stability is also important for effective monetary policy.

The recent measures include tightening loan classification and provisioning rules towards convergence with global best practices, introducing online supervisory reporting requirements on financial transactions and strengthening onsite and offsite vigilance.

Various measures to detect fraud have been implemented, it said.

The central bank has strengthened its supervision capacity as well as reiterated the role that bank boards and management play in this regard, the BB said.

The BB will focus on improving the quality, timeliness and transparency of reporting from the financial sector.

The central bank will also commence special diagnostic examinations at the four state banks in early 2013 and will begin publishing a set of quarterly performance indicators on these banks, the MPS said.

The MPS said the central bank will continue to encourage banks to focus on productive sectors and limit share of consumer credit.

Bank lending and practices which contribute to asset bubbles, such as in land prices, will be closely examined and discouraged, it said.

The MPS said closer bank supervision and inspection will also ensure that single borrower exposure limits are not exceeded so that the distribution of this private sector credit growth remains broad-based across the spectrum of different industry sizes.