Fighting Inflation Continues

Fuel Price adjustment and tight policy rate May cause inflation to attain the target.

Govt has cut prices of oil: price of diesel is cut by Taka 0.75/liter, price of octane is cut by Taka 4 /liter and price of petrol is cut by Taka 3/liter. The move is in line with govt's pledge to the IMF. From now onwards govt will adjust the fuel prices every month. In 2022,govt raised the fuel prices by Taka 50/liter in one fell swoop. All these years fuel prices remained high in spite of the fact that on some occasions fuel prices fell at international market. Despite huge criticism, govt did not lend ear to those shouts. Even the IMF First Review Report identified fuel prices as one of the factors influencing the inflation:

“Headline inflation reached a decade high of 9.9 percent year-on-year in August 2023,reflecting both recurrent cost-push shocks from both high and volatile food and fuel prices as well as the pass-through from Taka depreciation. “

Kitchen market volatility also stems from high fuel prices among other things. Government decided to not lower the diesel prices much fearing leakages/black market activity.High fuel price raises cost of black market activity and stops oil smuggling. This ,however, does not bar govt rationalizing the prices, bringing ease to everyone's life. For some reasons govt abstained from lowering fuel prices all these years, swelling Bangladesh Petroleum Corporation’s (BPC) profit.

Policy rate hike contained non-food inflation. But food inflation pushed the inflation high. Luckily February data shows that inflation has lowered to 9.67% from 9.86% in January. Monetary tightening measures are working but slowly and face criticism. Often causes of inflation are put forward as argument and ongoing policies are called into question. IMF First Review Report stresses on monetary tightening among others to bring back macroeconomic stability in coming months:

“…current pace of monetary tightening seems appropriate and the authorities based on the incoming macroeconomic should continue the current tightening bias until the disinflation process is firmly established. “(P-10,IMF First Review Report)

In addition to the monetary tightening, the review report also underscores neutral fiscal policy stance and flexible exchange rate to get the economy on track. We witnessed that government cut spending on export subsidies and introduced band corridor for the exchange rate of Taka against USD. Policy rate hike along with fuel price adjustment, a liberal exchange rate and low budget deficit target are likely to bring good news in coming months.