Monetary Policy Statement Review 2HFY23

Bangladesh Bank (BB) released cautiously accommodative Monetary Policy Statement (MPS) for second half of FY23 (Jan’23-Jun’23) amid inflationary pressure.

· BB raised the repo rate and reverse repo rate by 25 bps to 6.00% and 4.25% respectively

· Raised lending rate cap for consumer’s credit to 12.0% from 9.0% and removed floor rate on deposit

· Removal of the remaining lending rate cap will be considered once the central bank finds the economic situation to be suited for such action

· Considering implementation of market based, flexible and unified exchange rate regime (within a 2.00% variation) by end of FY23

MAJOR POLICY STANCES AND ANALYST’S OBSERVATION

BB’s Hike of Policy Rates and Relaxation in Lending rate Cap

BB raises the repo rate and reverse repo rate by 25bps to 6.00% and 4.25% respectively. BB is focusing on suppressing the inflationary pressure by tackling the demand side by raising policy rates and giving indication to the market regarding BB’s stance.

Repo transaction with BB in Bangladesh depends on the discretion of BB and liquidity needs of banks. With existing lending rate cap at 9.0% (12.0% for consumer credit), the impact of raising policy rate is likely to remain muted.

However, BB is showing intent to bring changes in the current interest rate regime through gradual shift from the interest rate cap policy.

Net Foreign Asset Growth and Broad Money Growth Target Curtailed

BB curtailed the net foreign asset growth target to negative 11.9% from negative 2.1% as BoP (Balance of Payments) deficit persists. Broad money growth target has also been reduced to 11.5% from 12.1% as negative growth from net foreign asset continues to put downward pressure.

BB’s Intention to Implement Market based, Flexible and Unified Exchange Rate Regime is Welcoming

BB intends to implement market based, flexible and unified exchange rate regime (within a 2.00% variation) by end of FY23. We view that such policy action, if implemented, will bring stability in the currency market.

The central bank is gradually relaxing interest rate cap policy and planning to implement market based exchange rate by June this year. It shows that central bank has the intention to gradually make reforms to tackle current macroeconomic challenges.