Will Taka Remain Stable?

War leads to further rise in inflation, Policy rate cut may cause depreciation.

Last week exchange rate of Taka reached 123.30 against US dollar. Now the rate settled at Tk 122.75 per USD. The ongoing war in the Middle East cast a shadow over remittance inflow and supply of energy through the strait of Hormuz. Moreover, govt changed Bangladesh Bank governor abruptly and the new governor hinted to lower the policy rate while inflation rate increased further and hovering around 9.13% in February. In January ,it was 8.58%. In this backdrop, serious question raised over continuity of regulatory discipline.

Throughout the fasting month of Ramzan ,key kitchen items registered higher prices. A new war in the Middle East risks worsening the inflation by causing supply problems [for] energy and spiking the fuel price. Despite govt assurance of no fuel crisis at home, the long queue of motorbikes and cars in front of petrol pumps is a testament to panic prevailing at the ground. Central banks of major economies already shelve their plans to lower policy rate while ours one walks on a different direction. Furthermore, abrupt dismissal of governor sent a wrong signal abroad about commitment to reforms. It may delay improvement of our credit ratings, causing troubles to get foreign credit for private sector.

Taking a look at major macroeconomic indicators tells that time is indeed not right for a policy rate slash. During July-January period of 2025-26, export declined to $26.09 billion from $26.36 billion in 2024-25. Trade deficit increased to $13.79 billion in 2025-26(July-January) from $11.74 billion in 2024-25(July-January). Current account deficit declined to $381 million in 2025-26(July-January) million from $1.31 billion in in 2024-25(July-January),riding on growth of remittance. Remittance rose to $19.43 billion in 2025-26(July-January) from $15.96 billion in 2025-26(July-January)(See https://www.bb.org.bd/en/index.php/econdata/bop). Despite improvement in current account deficit, situation is not right for discarding the tight momentary policy. [Particularly] when the war may derail the growth of remittance. At one hand trade deficit is growing ,on the other rising import and uncertainty over remittance put overall macroeconomic situation at a precarious position. In this situation, lowering the policy rate will increase the depreciation pressure on Taka against other currencies. Any wild fall of Taka worsens inflationary situation through pass-through effect of the new exchange rate.

Moreover, further worsening of war will spike fuel prices and deteriorate inflation in advanced economies, where most of our exportable items go. This will cut the purchasing power of their nationals and lower overall consumption. Declining trend of export will further cause depreciation pressure on Taka. When exchange rate and inflation rate will both rise ,real effective exchange rate will fall further given denominator part of the formula remains same(look at the formula).

REER at period t= (Exchange rate index of a country x Inflation rate of the country)x 100÷(Average of trading partners' exchange rate index x weight x Average of inflation rates in partner countries)

Exchange Rate Index at t= (Exchange rate of a county's currency at t)÷(Exchange rate of a county's currency at base period)

So far US dollar appreciated against other currencies following the start of the war. Since we do trade with other partners in USD ,a stronger USD translates into depreciation of real exchange rate of Taka given other things remain same. However, inflation is likely to rise amid escalating war . When average of inflation rates in partner countries is higher than exchange rate of Taka and inflation at home,then Taka will appreciate in real term (see the formula).

Stability of Taka depends on many things. But so far the development indicates Taka is likely to depreciate further if the war turns out to be a protracted one. We coped with 40% depreciation of Taka all these years. Similar or more depreciation will be unbearable for us. So cautious monetary policy ,which implies a tighter one, will be good for us. Does the central bank have courage and commitment to do so?