An increase in bank lending rates generally has a mixed effect on the country’s economy. A rise in interest rates increases the cost of borrowing. This has a direct impact on the financial management of individuals and organizations. Analysts believe that even if the banks benefit in the short term in some cases, overall other sectors of the economy may face losses.

Inflation has been on the rise in the country for a long time. Bangladesh Bank has consistently increased policy interest rates to curb inflation. Recently on October 22, the policy interest rate or repo rate was increased by 50 percent points from 9.50 percent to 10 percent. As a result, the interest rate of the money that the banks will borrow from the central bank will increase. That is, Bangladesh Bank is on the path of more contractionary money supply.

Those concerned in the sector feel that the effect of increasing the interest rate of bank loans will be very visible in two cases. One is inflation and the other is investment. In both cases, the long-term impact of interest rate hikes is more likely to be positive.

It is known that the interest rate of bank loans is also increasing by leaps and bounds. Small, medium and large businessmen who depend on bank loans are worried because of the increase in interest.

Traders say that the ongoing unrest in the country has reduced the demand for non-essential products. The sales of most of the companies have collapsed due to this. In such a situation, due to the increase in the interest rate of the loan, additional pressure has been created. Many entrepreneurs are shelving their business expansion and new investment plans due to high interest rates.

Bank loan interest rate was 9 percent in June last year as well. Currently, it has increased to 14 to 15 percent. The central bank announced another round of policy interest rate hikes on October 22. Entrepreneurs are afraid that the interest rate of bank loans may increase again.

In April 2020, on the advice of the government, Bangladesh Bank fixed the interest rate on bank loans at a maximum of 9 percent. At that time, the interest rate on term deposits was also fixed in line with inflation, that rate was 6 percent. After that for a long time the interest rate on loans and deposits in the bank sector was limited to 9-6. Interest rates started to rise in July last year when the economy faced various crises including high inflation.

After Ahsan H Mansoor took over as governor last August, he decided to raise the policy interest rate to curb inflation. As part of this, the policy rate has been hiked twice in the last two months.

The private investment situation in the country is not promising. The growth in private investment was 5.8 percent in the outgoing fiscal year 2023-24. But in the financial year 2021-22, the growth was 11.8 percent. Meanwhile, there is no good news for investment this year as well.

According to the data of Bangladesh Bank, in the first two months of the current fiscal year 2024-25, 28.5 million dollars’ worth of loans were opened for the import of capital equipment, which is 43.71 percent less than the same period last year. Even during this period the import of primary raw materials decreased by 9.81 percent.

Economists say that if the interest rate is low, the customers are interested in taking bank loans. As a result, taking loans at low interest increases the supply of money in the market. But bank deposits or savings do not increase. The result is inflation. To curb this inflation, interest rates are raised, making people less willing to borrow and reducing the supply of money in the market.

Bangladesh had the highest inflation rate in the region last month as well. Headline inflation has been above 9 percent for more than two years. Pakistan, the most economically distressed country in the region, now has a lower inflation rate than Bangladesh. Inflation cannot be brought under control in Bangladesh even with measures like interest rate hike, product import and market surveillance. Among them, the increase in the price of food products in neighboring India is creating new fears. There too the rate of inflation now exceeds 5 percent.