BB tightens belt to tackle stubborn inflation; Policy rate hiked by 50 basis points to 8.50pc

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BB tightens belt to tackle stubborn inflation; Policy rate hiked by 50 basis points to 8.50pc

BMirror Report:

Bangladesh Bank (BB) has stepped up its fight against inflation, raising its key interest rate by 50 basis points to 8.5% on Wednesday. This decision, announced after a meeting of the Monetary Policy Committee (MPC), marks the eighth consecutive increase since May 2022, reflecting the central bank’s growing concern about persistently high inflation.

The Governor of BB, Abdur Rouf Talukder, led the MPC meeting, joined by other prominent economists like Dr. Md. Habibur Rahman (BB Deputy Governor) and Dr. Binayak Sen (Director General of Bangladesh Institute of Development Studies). This collective effort highlights the seriousness of the situation and the collaborative approach being taken to address it.

Inflation has been a major headache for the Bangladeshi government, particularly impacting low-income households. The rising cost of food items, a significant portion of many Bangladeshi families’ budgets, has caused hardship. In response, BB is aiming to “anchor inflation expectations at the desired level” through this latest interest rate hike.

The new policy goes beyond just the key rate increase.  The Standing Lending Facility (SLF) rate, which influences the cost of short-term borrowing for banks from BB, has also been raised by 50 basis points to 10%. Similarly, the Standing Deposit Facility (SDF) rate, which determines the interest BB offers on deposited funds by banks, has been increased to 7%. This strategy, maintaining a corridor of 1.5 percentage points between the two lending rates, aims to tighten the overall money supply in the economy.

By making borrowing more expensive, BB discourages businesses and individuals from taking out loans. This reduces the amount of money circulating in the economy, theoretically leading to lower demand for goods and services. With less demand, businesses are less likely to raise prices, ultimately helping to curb inflation.

However, this approach is not without its drawbacks. Higher interest rates can stifle economic growth by making investments less attractive. Businesses may be hesitant to borrow for expansion or new projects, potentially slowing down job creation. Additionally, existing borrowers, such as those with mortgages or car loans, will see their monthly payments increase, putting a strain on household budgets.

The central bank acknowledges these potential downsides and has stated that the “monetary contractionary measures will be continued until the inflation target is achieved.” This implies a willingness to maintain the current course of action until inflation falls to a manageable level, even if it means sacrificing some economic growth in the short term.

The success of BB’s strategy hinges on several factors. The effectiveness of the interest rate hikes will depend on how they influence consumer spending habits and business investment decisions. Additionally, external factors like global commodity prices and supply chain disruptions can also play a role in inflation.

The coming months will be crucial in gauging the impact of BB’s tightening measures. While some economic slowdown is expected, the central bank hopes to achieve a delicate balance – taming inflation without hindering long-term economic growth. The fight against inflation remains a work in progress, and Bangladeshis will be closely watching how these policies unfold and impact their daily lives.

Bmirrorhttps://bmirror.net/
businessmirror20@gmail.com

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