MPS has raised policy rate again Bangladesh Bank introduced Monetary Policy Statement (MPS) for January-June period. Continuation of Gradualist policy,small increase in interest rate at measured intervals so that employment is not affected much, translates into a twenty five basis points increase in policy rate. The MPS was introduced at a time when Islamic banks are still reeling from the shock of liquidity crisis stemmed from fraudulent activities. MPS aims to increase deposit growth at banks by removing the lending rate on consumer credit. In addition, the central bank aims to move towards unified exchange rate with a variation up to 2% by the end of June. Both the govt and central bank tend to contain inflation at 5.30%.Despite slight improvement,inflation is still hovering around 8.75% as per the official statistics. By the end of June we will have a complete picture whether the MPS is working or not. There are reports that central bank injected TK 560 billion to face the ongoing liquidity crisis. While the stolen/laundered money is in operation somewhere,this extra money coupled with money off the radar will definitely create pressure on price level. Increasing the lending rate and maintaining a variation of 3% between lending rate and deposit rate may not improve the situation while inflation rate is eight point something! Unofficially inflation is still in double digit figure. Except flour and potato,kitchen commodities show no sign of a downward trend. Govt is optimistic that inflation may come down by June this year. However, very few pay heed former Russian President’s forecast that oil price may reach $150/barrel by June this year1. This may cause another bout of price level hike. Though presented as a joke ,we should not take the prediction lightly. Latest MPS boasts Bangladesh had an impressive private sector credit growth(around 12%) after India in this region. Meanwhile, we witnessed how a group laundered fraudulently billions of Taka while IMF team’s visit to Bangladesh in November 2022. And much of the credit goes to pay back old loans. There is hardly any productive use of these credits. Another thing I noticed is that central bank thinks export receipt reflects external demand growth for Bangladeshi items.It is oblivious of the fact that advanced economies' inflation is still high( In the UK, it is 10% and in the USA it has come down to 7%).Inflationary contribution to export receipt is completely ignored here. Moving towards a unified exchange rate is a good one. But while most of the economies around the world have focused on increasing their gold reserve,we have gone to opposite direction.It is a record since world war II2. Ours one treaded on an opposite path: selling part of its gold reserve to increase the forex reserve. Despite an EU ban, even Switzerland procured Russian gold to raise its gold stock. Apart from swelling our US dollar stock, we should also raise our gold reserve. In case of another unprecedented fuel price hike or dollar crisis, a significant amount of gold reserve will insulate Taka from unexpected fall. Cautious optimism displayed throughout the MPS is laudable. However, it is unclear how many of the goals central bank is going to attain. Refinance scheme for import-substitute product and private sector credit growth may backfire while fraudulent activities continue unabated. Growth forecast revision for major economies by multilateral institutions cast a shadow over recovery. This may also alter the price levels. Notes And References
[update:This piece has been updated on January 25,2023 at 9:34 am Bangladesh Standard Time.Update includes notes and references.]
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