The central bank unveiled Sunday its half-yearly monetary policy that aims at keeping inflation rate at around 7.0 per cent by the end of this fiscal through discouraging credit flow to unproductive sectors.

Other major thrust of the policy will on achieving an inclusive economic growth by facilitating productive sectors while keeping inflationary pressure under control.

"Monetary policy stance in the second half (H2) of this fiscal will, as before, remain accommodative for productive economic activities; while also firmly discouraging diversion and undue expansion of bank credit for wasteful unproductive uses, to stem build-up of inflationary pressures," Bangladesh Bank (BB) Governor Atiur Rahman told reporters at the central bank while releasing the monetary policy for January-June period of the fiscal 2010-11 (FY11).

He also said climatic adversities disrupting output in many regions around the world are pushing up global prices of food commodities; strong growth performance in emerging and developing economies is propping up global prices of energy and non-food industrial commodities as well.

"Against this backdrop, decline in the 12-month average CPI inflation in Bangladesh in H2 FY11 may be slower than expected earlier, remaining above the 6.5 per cent level targeted in government's FY11 budget. A level around 7.00 per cent appears to be likelier for June 2011," the central bank chief added.

He also said the government could re-fix energy price in H2 of this fiscal that will impart some upward spurt on non-food CPI inflation.

"Food price inflation remained volatile in H1 FY11 both domestically and globally, at 9.80 per cent in November in Bangladesh against 10.88 percent of June 2010," Dr. Rahman added.

The country's inflation as measured by consumers' price index (CPI) moved slightly in the month of November last mainly because of increase in prices of food items.

The inflation rate moved up to 8.14 per cent in November from 8.12 per cent of the previous month on the annual average basis, according to the Bangladesh Bureau of Statistics (BBS) data.

On the other hand, the point-to-point inflation rate rose to 7.54 per cent in November from 6.86 per cent in October 2010 despite declining prices of non-food items.

Stubbornly high food price inflation in neighboring fast growing India, and prevailing high international prices of food commodities mean that no calming influence on food prices are to be expected from private sector imports, the reason why local rice prices are high and rising even after a good aman harvest, the BB said.

"Monetary policy actions will have little leverage on rising food prices in this situation, fiscal measures by way of subsidized food grain sales from public stock may need to be expanded to ease hardships faced by low income population segments," the monetary policy said.

It also said higher food grain prices for growers have important medium term upsides however; enabling the government to scale down input subsidies as growers get market prices adequately covering their costs and remunerating their efforts, and the price incentive eliciting higher output responses is eventually stabilising prices.

"Barring unforeseen new difficulties, the economy looks well poised to attain the 6.7 per cent real gross domestic product (GDP) growth targeted for FY11, as also to leap forward to growth performance well beyond seven percent in FY12," the BB governor noted.

The central bank has taken measures to reduce credit flow to the private sector through asking some banks to bring down their credit deposit ratio (CDR) at a rational level and imposing restriction on consumer financing.

"We've already imposed restriction on consumer financing so that banks are discouraged to lend to unproductive sectors," BB Senior Deputy Governor Nazrul Huda said while replying to a query.

Credit flow to the private sector recorded a growth of 27.77 per cent to Tk 658.938 billion in November 2010 on a year-on-year basis compared to 16.73 per cent or Tk 340.175 billion in the same period of the previous calendar year, according to the central bank statistics.

However, the BB had set the private sector credit growth target at 16 per cent by the end of June 2011.

The BB deputy governor also said the central bank has sat with the banks, which have higher credit growth than that of deposit, separately to discuss the issue.

"Actually, the private sector credit growth was high last year," Mr. Huda said, adding that the credit flow to the private sector will come down at reasonable level if the banks maintain the existing CDR norm.

At least six commercial banks have CDR ranging between 84 and 94 per cent, instead of the standard 81 per cent, the central bank officials confirmed.

In conformity with the monetary policy stance and the financial inclusion initiative, the BB's credit policies in H2 FY11 will seek to redirect credit flows for unproductive wasteful uses into productive, employment and income generating uses.

"Supervisory vigil on lending and loan administration discipline in banks will remain stricter, lapses and laxities in lending banks will be dealt with sternly, eschewing forbearance," the BB said.

The central bank has kept broad money supply target unchanged at 15.2 per cent for FY11, which is higher considering the country's inflation and GDP growth, Deputy Governor of the BB Ziaul Hassan Siddiqui said.

"It's an accommodative monetary policy," Mr. Siddiqui said while mentioning the definitions between concretionary and neutral monetary polices.

Regarding energy prices revision, the BB deputy governor said the government will take decision on rising prices of fuel oils considering the country's macroeconomic stability. "It's not our basic task," he noted.

The first-ever monetary policy statement was formally published in January 2006 and the central bank of Bangladesh declared that it would publish it on a half-yearly basis along with a half-yearly policy review.

News: The Financialexpress / Bangladesh/ jan-31-2011