Impact Of Fed's Policy Rate Cut At Home

More foreign credit amid Fed's policy rate cut Rejuvenates the economy burying the but.

The Federal Reserve has lowered the funds rate by 50 basis points, making it 4.83%. Back in July, China lowered the policy rate by 10 basis points, from 3.45% to 3.35%. This time the Chinese central bank decides to keep the policy rate same. It is indeed a good news for Bangladesh and its economic recovery. It means foreign goods will be cheaper; in particular, import of food grains in the wake of devastating flash flood will be less costlier. Consumer spending in the West will rise due to low cost of borrowing,resulting in more procurement of Bangladeshi RMG.

It is conducive to bring down the price levels. Both non-food and food items may result in lower prices. There is no restriction from Bangladesh Bank on LCs to import food and other necessary items. Moreover, duties on several items are also lowered. As Bangladesh Bank is pursuing a contractionary monetary policy, downward pressure on prices of non essential non-food items may be observed soon. In addition, constant rise in remittances and foreign credit is growing the forex reserve and making taka stable. So any pressure on inflation from further depreciation is not visible at the moment.

Moreover, police resuming their role and magistracy power given to the Army for the next 60 days are likely to improve the law & order situation by disrupting the extensive extortion network in the kitchen market. Inflationary situation is bound to improve in the next few months.

Back in June 11, I depicted a scenario for the private sector credit in the piece "Macroeconomy Amid Trade War III".Sharing parts of it:

Fed funds rate: Less than 5.33%
Chinese loan prime rate: Less than 3.45%
This is an ideal situation for economic recovery. Inflationary pressure will be less. Policy rate hike does not need to be prolonged. Economic recovery will be earlier than any other scenarios. Both the Western and Chinese credit will be available. Western consumption will increase,boosting Bangladeshi export. FDIs will rise.

When the piece was written it was assumed that private sector credit would be more than Taka 1517.21 billion. $ 250 million of World Bank's $1 billion credit will go for the SME sector. In addition, the US assistance of $250 million will also go for the private sector. So we are seeing more than Taka 500 billion coming to private sector this year. Moreover, government also lowers borrowing from the banks, making available further bank funds for the private sector. Recently, after more than 7 years ,publicity of consumer credits is appearing on the dailies. Brands are running special ads of their new products. Business sector confidence is back. It is indicating rejuvenation of the economy.

Both domestic and external factors are in favor of fast economic recovery. However, thwarting political uncertainty and maintaining a trouble free supply chain ensures better consumer activity.

References:

1. "Fed Slashes Interest Rates By Half Point, An Aggressive Start To Its First Easing Campaign In Four Years",Jeff Cox,CNBC,September 18,2024. Link: https://www.cnbc.com/2024/09/18/fed-cuts-rates-september-2024-.html
2. "Macroeconomy Amid Trade War III",Rezaul Hoque,https://hoquestake.blogspot.com, June 11,2024. Link: https://hoquestake.blogspot.com/2024/06/macroeconomy-amid-trade-war-iii.html?m=1