A leading global financial services company has lauded Bangladesh Bank for its monetary intervention activities last year, terming the central bank's policy proactive. In conformity with the declared policy stance, BB's monetary policy operations during the early part of the year remained light fingered rather than heavy handed, said Citi in its annual monetary update.

The BB move did not impede pick-up in output, exports and new investment activities, it said. Purchases of foreign exchange inflows from the market to retain the taka on a slight undervaluation bias for export competitiveness were only partly sterilised by liquidity management operations. "Besides direct liquidity management operations, the permitted open exchange positions of banks were widened. Sectoral credit flows were promoted or discouraged eclectically, while credit flows to under-served productive sectors like agriculture and SMEs were promoted."

The BB policy also discouraged expansion in credit for unproductive ostentation, conspicuous consumption and speculative purposes, according to Citi. However, with the increase in inflationary pressure, the central bank was seen to gradually tighten policy measures. In August 2010, it raised the repo rate from 4.5 percent to 5.5 percent and the reverse repo rate from 2.5 percent to 3.5 percent. Earlier in May, it raised the cash reserve requirement (CRR) by 50 basis points (bps) to 5.5 percent, for the first time since September 2005, to mop up Tk 20 billion of excess liquidity.

In December, the CRR was further raised by 50 bps to 6 percent for the commercial banks to curb inflationary pressure on the economy, the Citi update said. The central bank moves also kept the taka under under depreciation pressure. The BB has regularly intervened in the dollar/taka market to maintain the competitiveness of the exchange rate, curbing tendencies for excessive volatility. The nominal exchange rate remained below 69.60 level until late August, with the BDT depreciating only 0.48 percent against the dollar from the opening level of 69.27.

However, increased demand of the greenback to meet import payments took the dollar/taka rate to break 70 level during late September. The taka depreciated 1.34 percent in September alone. With buoyant demand, and the central bank's stance to keep the taka undervalued, dollar/taka rates rose to 70.8450, the highest level during the year, by the end of October. After a moderation in November, the nominal exchange rate started to rise again in December, and hovered near 70.69 levels in direct trading during the middle of the month, registering a depreciation of 2.05 percent over the year.

Call money rates remained stable during most part of the year due mainly to the excess liquidity in the market, which stood slightly lower at Tk 345.0 billion at the end of June 2010, down from Tk 347.6 billion at the end of June 2009. However, the CRR hike in May, and increased seasonal demand ahead of Eid festivals during September and November led call money rates to rise to double-digit levels, the update said. "Although those increases were corrected within a short span of time, the second CRR hike of the year in December led the overnight rates to soar significantly."

On December 15, the first day of new cash reserve maintenance, call rates skyrocketed when some private commercial banks sought large funds to meet the reserve requirements. Call money rate rose as high as 180 percent, breaking the earlier record of 150 percent hit on March 30, 2006. However, the rates subsided over the following weeks to settle below 20 percent level. The downward shift in the yield curve during 2009 was reversed last year due to excess liquidity in the banking system, Citi said.

The yields for government securities of all tenors increased from their December 2009 levels. The yields of short-end bills with 91 days, 182 days and 364 days tenor rose by 225 bps, 120 bps and 89 bps respectively. On the other hand, rates of mid- and long-end government bonds with 5 years, 10 years, 15 years and 20 years tenor increased by 20 bps, 75 bps, 43 bps and 35 bps respectively. The increase in yield was highest in the 91 days bill, which added 225 bps. Citi in its update also put focus on international markets and major interest rates.

Central banks of the major economies had slashed rates to historic low levels by the middle of 2009 to push out liquidity to try igniting economic growth, it said. The Bank of England, European Central Bank (ECB), Bank of Canada, Swiss National Bank, Reserve Bank of Australia, Reserve Bank of India, all cut their benchmark rates by 25 to 175 basis points in 2009. The Federal Reserve (Fed) and Bank of Japan (BOJ) had already been at their record low levels of benchmark rates at 0 to 0.25 percent and 0.1 percent respectively after their December, 2008 rate cuts. While the central banks of Australia and Norway started hiking rates from late last year, 2010 witnessed the RBI, the Peoples' Bank of China and the Bank of Canada joining the group.

For most of 2010, the fundamental story behind Euro (EUR), when investors were actually looking at it, was all about sovereign credit risk, Citi said.

News: The Daily Star/03 Jan 2011