Photo: Messenger
The monetary policy for the January-June period of six months is set to be announced tomorrow amid experts’ argument that controlling inflation through an interest rate hike may not be effective.
Officials from the Bangladesh Bank have indicated that an increase in the interest rate will be part of this announcement. Experts suggest that an increase in the interest rate could potentially hinder the growth of the private sector and impede employment opportunities.
A high-ranking official from the Bangladesh Bank, speaking on the condition of anonymity, has characterised this year's monetary policy as a challenge primarily aimed at curbing inflation.
The official explained to The Daily Messenger that inflation has been significantly impacting the general population, making its reduction a critical objective. He emphasised that the challenge is to bring down inflation, and to address this, there will be a 40 basis points increase in the repo rate.
However, another senior official from the central bank, seeking anonymity, expressed a differing view. He stated, "In a third-world country like ours, raising interest rates does not necessarily lead to a reduction in inflation."
According to him, addressing inflation requires a more multifaceted approach. In countries with ample unemployment, increasing interest rates may not help control inflation. However, in Bangladesh, where unemployment is prevalent, raising interest rates could discourage lending in the private sector. This, in turn, might lead to a shortage of new loans and subsequently, a lack of new projects. The official argued that without the stimulus of new projects, employment opportunities would not increase, and without employment growth, inflation is unlikely to decrease. Instead, such a move could potentially exacerbate the existing economic challenges.
Former Chairman and Professor of Economics Department of Dhaka University Abu Ahmed told The Daily Messenger, "Indeed, our country's economy is intricately tied to investments in various sectors. An increase in investment has a direct impact on the overall supply, playing a vital role in shaping our economic landscape. It's important to recognise that our economy is not solely reliant on employment; rather, emphasising and promoting investment becomes crucial for strengthening the economic foundation. Focusing on robust investment strategies can contribute significantly to the growth and sustainability of the economy.”
“Maintaining low interest rates can serve as a catalyst for increased investment. When interest rates are kept low, borrowing costs decrease, making it more enticing for businesses to invest in new projects and expansions. This, in turn, can invigorate economic activity and contribute to overall growth.”
He also said, “The current account deficit indeed plays a significant role in shaping a country's economic landscape.”
“When a country consistently runs a current account deficit, it means that it is spending more on imports than it is earning from exports. This situation puts pressure on foreign exchange reserves. If reserves decrease, the value of the national currency may also decline. As a consequence, the cost of importing goods rises due to the weaker currency, contributing to inflation.”
He added, “Addressing the current account deficit and managing foreign exchange reserves are crucial aspects of economic policy to ensure stability and control inflation. Policymakers often work to strike a balance in trade and maintain healthy foreign reserves to mitigate the adverse effects on the currency's value and, subsequently, inflation.”
Economic analyst Mazadul Hoque told The daily Messenger that, “In the context of Bangladesh, a concerted effort between monetary and fiscal policies is essential to curb inflation. The elevated tariff rates, encompassing customs duty, regular duty, and supplementary duty, which stand at approximately 27 percent in Bangladesh, significantly contribute to heightened import costs, surpassing the world average of 6 percent. To address inflation, immediate actions involve trimming budgetary and project expenditures. A comprehensive strategy should address the ongoing dollar crisis and necessitate a contractionary fiscal policy to lower price levels. The high trade tax is a key factor driving up commodity prices, compounded by the depreciation of the Bangladeshi Taka against the US dollar. Additionally, persistent income inequality exacerbates inflationary pressures.”
He added, “Enforcing the Competition Commission Act of 2012 on large conglomerates is crucial to fostering competition in the market. Addressing inflation doesn't necessarily require additional decisions on oil, gas, electricity, and water prices. Instead, focus should be placed on establishing a seamless supply chain for efficient product distribution.”
The managing director of a leading private bank raised the question of how much it is possible to control inflation by increasing interest rates.
He told The Daily Messenger on condition of anonymity, "If inflation can be controlled by raising interest rates, then it should be done."
“However, if the interest rate increases, number of customers will decrease. The interest rate on previous customer loans will increase. There is a risk of increasing defaults.”
“If the customer who has taken a loan at 9 percent interest has to pay 15 percent interest, then the customer will stop paying the loan. This has happened before. Besides, new factories will not be built if the debt of the private sector is reduced. This will further increase the unemployment rate which is currently high.”
Former governor of Bangladesh Bank Atiur Rahman thinks that it is not possible to control inflation by only increasing the interest rate.
He told The Daily Messenger, “Controlling inflation through interest rate adjustments can be effective, but it requires a comprehensive approach. While increasing interest rates can enhance bank supervision, it's crucial to ensure prudent lending practices, avoiding loans to high-risk customers. A one-time increase in policy interest rates may not suffice; instead, this tool should be applied iteratively. Coordination with fiscal policy is essential for the overall effectiveness of interest rate adjustments.”
Executive director of private think tank Policy Research Institute (PRI) and former chairman of BRAC Bank Ahsan H Mansur said, “Inflation cannot be controlled by increasing the policy rate once. However, there is no other option in monetary policy. So, money has to be made more attractive. The gap between dollars and taka should be reduced. Besides, the interest rate should be increased by 100 basis points every month. The lower the money supply, the lower the inflation.”
Messenger/Disha
