Governor Atiur Rahman announces conservative monetary policy for second half of fiscal year

The central bank will continue to follow its restrained monetary policy in the second half of the fiscal year in a bid to contain inflation and move to a higher growth path amid the prevailing political unrest.

Bangladesh Bank cited three reasons: the annual average CPI inflation is still above the targeted ceiling, core inflation continues to be trending upward and the political unrest is not subsiding even after 25 days.

“The cautiously restrained monetary policy stance of the first half will be continued in the second half, without any new loosening or tightening,” Bangladesh Bank Governor Atiur Rahman said while announcing the Monetary Policy Statement yesterday.

In the second half, a monetary growth path that would bring down the average annual inflation to 6.5 percent while ensuring sufficient credit growth to stimulate inclusive economic growth will be pursued.

The BB expects economic growth in fiscal 2014-15 to be a “respectable” 6.5-6.8 percent, which is below the government's target of 7.3 percent but in line with the development partners' forecasts.

Accordingly, the ceiling for private sector credit growth has been kept at 15.5 percent, which is sufficient to accommodate any substantial rise in investment and trade finance over the next six months, it said.

The business community views the existing average lending rate of 12.5 percent to be high enough to dampen investment, so the central bank will also endeavour to bring down the cost of funding by narrowing the existing spread of 5.2 percent.

It has also urged the commercial banks to devise ways to reduce the lending rates, which did not come down in line with the inflation trend over the last three years.

Inflation dropped almost 5 percentage points since the end of 2011 but the average lending rate fell only 1 percentage point in that time, empowering banks to earn high real rates of interest and making investment costlier than before.

Subsequently, the BB has left the repurchase rate unchanged at 7.25 percent and the reverse repo rate at 5.25 percent.

The regulator pledged to shore up banking governance to clamp down on loan delinquencies. While the cases of credit-worthy borrowers will be reviewed, habitual defaulters will face lawful consequences, it said.

The central bank will also look to further consolidate the country's external sector stability. It will continue to support a market-based exchange rate while seeking to avoid excessive swings.

The central bank will continue to maintain a comfortable amount of foreign currency reserves to cover imports of five to ten months.

This safety net is required to avoid any sudden collapse in the value of taka and to ensure a healthy growth of imports of productive inputs, the BB said, adding that it anticipates a further build-up in foreign exchange reserves in the second half.

The pace though would be more moderate than in fiscal 2013-14, as its projection suggests there will be a correction in export growth.

In the best-case scenario, the overall export growth in fiscal 2014-15 will be 8 percent, import growth 15 percent and remittance growth 12 percent, to yield a “reasonable” balance of payments surplus of $642 million.

The BB said Bangladesh evidenced the highest amount of stability in inflation and economic growth in the South Asian region over the last 20 years.

During the period, Bangla-desh's growth performance was the second best (5.73 percent) after India (6.77 percent) in the region and its inflation was the lowest (6.45 percent).