Monetary policy for H2 keeps policy rate steady at 10%

Bangladesh Bank has maintained the policy rate at 10% in its newly announced monetary policy for the second half of the current fiscal year (2024-25). 

The decision was revealed during a press conference held on Monday (February 10) by Bangladesh Bank Governor Dr Ahsan H Mansur, with senior central bank officials in attendance.

Since May 2022, when the policy rate stood at 5%, Bangladesh Bank has increased it a total of 10 times to combat persistently high inflation. 

Notably, on August 25, 2023, the rate was raised by 50 basis points to 9% and on September 24, 2023, it climbed further to 9.5%. Finally, on October 22, 2023, the rate was hiked to its current level of 10%.

Despite these measures, inflation remained stubbornly high, prompting concerns among entrepreneurs and economists alike. Critics argue that raising interest rates under the current economic conditions may not only fail to curb inflation but could also exacerbate challenges in investment, business, and employment.

Interestingly, inflation showed a slight decline last month, influencing the central bank's decision to keep the policy interest rate unchanged. "Considering the overall situation, including the marginal decrease in inflation and the potential impact on businesses, we decided to hold the policy interest rate steady," explained the governor.

Private credit growth target unchanged

The target for private credit growth remains fixed at 9.8%, consistent with the first half of the fiscal year. However, actual private credit growth has lagged significantly behind expectations. 

According to Bangladesh Bank data, private debt growth stood at 7.66% in November—a figure nearly two percentage points below the target and the lowest since May 2021 (7.55%).

For government debt growth, the target has been revised upward to 17.5%, compared to the previous target of 14.2% set in the earlier monetary policy announcement. This adjustment reflects the interim government's efforts to address fiscal needs while managing public borrowing responsibly.

Impact on businesses and investments

Entrepreneurs have expressed scepticism about the effectiveness of higher interest rates in controlling inflation. Many believe that continued rate hikes could hinder investment and stifle business activities, potentially leading to job losses. Economists concur, cautioning that increasing the policy interest rate might deter domestic and foreign investors due to rising borrowing costs.

Dr Mansur acknowledged these concerns, stating that the recent stabilization of inflation levels influenced their decision to pause further increases. "We aim to strike a balance between curbing inflation and supporting economic growth. Keeping the interest rate constant allows us to assess the impact of previous adjustments before taking additional steps."