Be Unpredictable

Be unpredictable in making monetary decision To get rid of forex market speculation.

The central bank and some key banks decided not to trade USD beyond Tk 123/USD. The decision came in the wake of USD being sold at Tk127/USD. Though some local exchange houses are blamed for unusual hike,there may be other reasons. Corruption allegations against some groups which are supposed to be major importers are brought to surface. Some owners of these groups become foreign resident and threat the government to face legal consequences if government continues to freeze their assets at home. In this melee, fate of the loan they took from banks become uncertain. So govt has either to pump money into the trouble ridden banks, which already drew criticism even from the IMF, or to shut down few banks,which never happened in Bangladesh. When the Trump administration will assume power ,it will definitely take tough stance on foreign aid. In addition, FDI has yet to come in big numbers. Govt even signalled the market that it will not release USD from forex reserve. These factors to some extent contribute to the depreciation of Taka.

However, there is argument that some exchange houses unreasonably put the USD rate high. The move even irked the governor. During the previous regime, rumor has it that former governor's relative got involved in exchange rate manipulation. Even if speculation has some role to play in the rate, I think the greatest danger may come from the foreign remittance houses. I wrote a piece about it last year.(Read "Exchange Rate Volatility: Policy Debacle Should Be Blamed")

The best way to get rid of this kind of speculation is to become unpredictable about the policy move.Well, it is certain that the central bank is going to raise policy rate under contractionary monetary policy. But when it will do that should remain unpredictable. For instance, it is sure that the next MPS ,likely to be published in January, will have the announcement of policy rate hike. Immediately after the raise,Taka will have a tendency to appreciate depending on the degree of the hike. If the market senses that the raise in the days to come will not contain the inflation then there will be speculative move.

From July to December, if the central bank raised the policy rate couple of times by 25 basis points at regular intervals , then we would not have seen this speculation in the forex market. Govt should be more unpredictable in its monetary policy decisions.