The central bank unveils monetary policy statement for Jul-Dec

The central bank yesterday signalled cuts in policy rates in the coming months if inflation continues its downward trend.

Bangladesh Bank will have no hesitation in easing the repo and reverse repo policy interest rates right away should the headline and core CPI inflation take a clear downward turn, said Governor Atiur Rahman.

Rahman's comments came yesterday at the unveiling of the monetary policy for the first half of the fiscal year.

The repo and reverse repo rates have been kept unchanged at 7.25 percent and 5.25 percent respectively since February 2013.

General inflation fell from 6.87 percent in January to 6.4 percent in June.

A decline in inflation over just one or two months would not induce rate cuts, said Biru Paksha Paul, chief economist of the central bank.

Core inflation, which counts non-food and non-fuel inflation, is on the rise: it rose from 6.08 percent in January to 6.74 percent in June.

Non-food and non-fuel core consumer price index (CPI) inflation has remained upward in May and June, indicating that the task of bearing down on inflation expectations is not yet over, Rahman said.

The central bank has opted for a restrained but explicitly pro-growth monetary policy stance, one that supports the 7 percent growth target and the 6.2 percent inflation target for fiscal 2015-16.

Private sector credit may grow 14.3 percent for the first half and 15 percent for the entire fiscal year, according to the BB.

The new target is 0.5 percentage points lower than the one in the previous monetary policy but 1.4 percentage points higher than the actual figure. 

As of May, the private sector credit growth stood at 13.6 percent and was most definitely the same in June, against the growth target of 15.5 percent. 

Rahman said some quarters hold the view that setting high targets for credit expansion is needed for stimulating higher rates of GDP growth.

However, pumping in excessive liquidity in absence of progress in addressing the infrastructural adequacies and other well-known investment impediments will only stoke inflation and worsen social inequity by encouraging unproductive speculative pursuits.

The stance is serving the economy well in maintaining a moderate inflation on a sustained basis, Rahman said, adding that the new MPS is almost the continuation of the previous one.

“The car is motoring ahead -- we don't want to create any instability by increasing or decreasing the speed of it.”

The central bank has put emphasis on inclusive growth as part of the country's efforts to improve the quality of people's lives.  

Owing to inclusive growth, which has created a huge number of jobs, there had been no social unrest in Bangladesh in spite of political turmoil, he said.

Besides the ongoing inclusive financing for farm and non-farm small and medium enterprises and the export development fund support for exporters, new medium to longer term financing windows will be opened in fiscal 2015-16, said the statement. 

A fund for $500 million will be created to support medium- and long-term projects, especially environmentally responsible investments at lower interest rates.

The World Bank will contribute $300 million as credit, and the rest will come from the central bank. 

The WB fund will be for medium to longer term foreign currency financing of manufacturing projects, while the central bank's part will be used for green initiatives in export-oriented textiles, apparel and leather sectors.

The central bank expects 14 percent growth in imports, 7.5 percent growth in exports and 10 percent growth in remittances this fiscal year.

The recent sustained pick-up in investment and consumption imports will ease the appreciation of the taka in the near-term, enhancing its export competitiveness, according to the statement. 

It said the growth rate of foreign exchange reserves will slow down and the import coverage will fall before reserves turn out to be a liability.

The foreign reserves are projected to reach $26 billion in fiscal 2015-16 from $25 billion the year before, but the import coverage will marginally fall from 6.2 to 5.7 months.

The statement also touched upon the issue of classified loans, stating that the central bank will not be lenient in clamping it down.

While the cases of the credible borrowers with potential for better businesses will be reviewed, the central bank will not hesitate to take any stern measures against the habitual defaulters and bad borrowers with a track record of persistent delinquencies.

About keeping the policy rates unchanged, Paul gave the example of repo rate of 7.25 percent.

He said it has remained the same for long, which may signal that it has remained stagnant. “But we have kept it unchanged in an effort to keep the inflation in check.”

The chief economist said the central bank sits for a meeting every month on the monetary policy. “If we see there is demand for credit and inflation is stable we will accommodate the demand.”

SK Sur Chowdhury, a deputy governor of the central bank, said the BB is aiming to lift people from the lower strata of society without bringing down those from the higher echelon. 

Allah Malik Kazemi, change management adviser of the central bank, said the targeted private sector credit growth is enough to help the government achieve its GDP and inflation targets for the current fiscal year.

Deputy Governor Nazneen Sultana said the central bank, with support from the National Board of Revenue, is closely monitoring the foreign exchange transaction.

The system is now transparent, so there is no possibility for irregularities, she added.