The New MPS: Acknowledging Past Policy Blunder

BB keeps policy rate same in the MPS For ending early the economic mess.

Bangladesh Bank published the Monetary Policy Statement (MPS)for the second half of the current fiscal year. Contrary to the anticipation, the central bank did not raise the policy rate. As inflation hovers around 9.94% , previous policy rate of 10% is still in play. The central bank is optimistic that inflation will be brought down to 8% by June.

Even in the MPS ,the central bank displays the world commodity price indices,which registered decline in recent years. Energy and food grain prices,which matter to us a lot, register decline in recent months. So the context for easing the inflation has been set.

Unlike the pessimism of the central bank about the tariff war, I think it will further accelerates the fall in prices of major commodities. In earlier pieces, I had already touched it.

This MPS for the first time acknowledged the policy blunder of not raising the policy rate when inflation was soaring. The 5-year-long policy rate ceiling cost the economy a lot. In January this year, for the first time we witness a positive real interest rate,heralding the new dawn for curbing the exorbitant price levels.

The MPS also elaborated central bank's plan to deal with bank reform and to tackle Non Performing Loan(NPL) ,which is likely to reach 30% of total loan by June this year as apprehended by the governor himself. Since the government is going for early election in December this year, I do not think there will be drastic improvement in the endeavor to recover NPL. Rather ,after election, NPL situation may turn worst: there is lack of commitment of foreign assistance so new govt may indulge in doling out soft credit/ cash that may ultimately meet the fate of NPL.

The good thing about the new elected govt is that it will have mandate for four years,giving the investors the confidence to invest here. Unfortunately, private sector credit growth declined significantly. On the other hand,public sector credit growth surpassed the anticipation in the wake of lack of foreign budget assistance. The MPS revealed by December 2024, public sector credit growth reached 18.1% against the projected 14.2% growth. Meanwhile, private sector credit growth shrinked to 7.3% against the projected 9.8% growth. Clearly, private sector deserves more credit in order to bring pace to the economy. Hopefully, at the start of 2026, foreign banks will give Bangladeshi banks more credit in spite of poor credit ratings of Bangladesh. Apart from that govt requires to mobilize resources to private sector by adjusting the fiscal policy,which is less likely to happen when a new elected govt will take charge of the country.

In the monetary policy resolution, as well as in the press conference, the central bank jibed at the Dubai-based exchange houses that were found in speculative activity in the local currency market in December 2024. Earlier in 2023, another Saudi-basee exchange house took part in currency manipulation. I elaborated the issue here in a piece titled "Exchange Rate Volatility: Policy Debacle Should Be Blamed" in November 2023. It is not clear whether we are getting the rich Middle Eastern countries' IMF currency holdings as credit ,but it is certain that some big exchange houses of these countries taking advantage of the situation by engaging in currency manipulation (Read "Bangladesh Bailout: Repeat Of Pakistani Incident", published here in December 2023). Governor brought the matter to the attention of the IMF and the respective country. Let us see what action they take in this regard.

In brief, the latest MPS acknowledged past policy mistakes and set an optimistic tone for economic recovery. But the sheer size of NPL and political commitment of the upcoming government will be the deciding factor behind early economic recovery. Till the next MPS sees the light,the current MPS chalks out a path to contain the inflation, a priority for the interim govt. If the central bank can implement it,that will be a tremendous help to ordinary people and the private sector.