BB cuts key rates in expansionary, accommodative monetary policy

Economists fear fund may flow to non-productive sectors

HM Murtuza | Published: 23:18, Jul 29,2020


The Bangladesh Bank on Wednesday unveiled an expansionary and accommodative monetary policy for the fiscal year 2020-2021, lowering the bank rate to 4 per cent from 5 per cent after 17 years to rationalise it with the current interest rate regime.

In the monetary policy statement, the overnight repurchase agreement (REPO) and reverse REPO rates have also been lowered to 4.75 per cent and 4 per cent respectively from 5.25 per cent and 4.75 per cent with a view to ensuring the availability of less costly funds for banks and rationalising the policy rates’ corridor (the gap between the repo and reverse repo rates).

The central bank projected that the growth of credit to the government would be 44.4 per cent at the end of the current fiscal year against the growth rate of 53.3 per cent in FY20.

The policy also mentioned that the broad money circulation would rise by 2.9 percentage points to 15.6 per cent at the end of June of FY21 from 12.7 per cent at the end of June of FY20.

Former Bangladesh Bank governor Salehuddin Ahmed and Policy Research Institute executive director Ahsan H Mansur told New Age that the policy of the central bank would increase money flow and utilising the money cautiously would be vital.

Otherwise, people may invest their money in non-productive sectors, they said, adding that the central bank should have to tighten the money supply, if necessary.

The BB projected 14.8 per cent private sector credit growth target for FY21, much higher than the actual 8.61 per cent growth in the immediate past fiscal year 2019-2020. For the first half of FY21, the growth target has been set at 11.5 per cent.

However, the credit growth target for FY21 has been kept unchanged considering the BB’s projection over attaining 14.8 per cent private sector credit growth target in FY20.

The monitory policy mentioned adapting of strategies to support with adequate finance the priority sectors including cottage, micro, small and medium entrepreneurs, manufacturing, and industries with the options of necessary adjustment to match the demand of the specific sectors.

In the MPS, the central bank said, ‘The prime objectives of the monetary policy stance and monetary programmes for FY21 are the recovery of the economy from the adversity of the coronavirus pandemic and rehabilitation of the production capacity including restoration of the normal livelihoods of the people along with maintaining dual goals of price stability and quality growth.’

In a written statement on the monetary policy, BB governor Fazle Kabir said, ‘It is clear, the monetary policy stance and monetary programmes for FY21 are expansionary and accommodative.’

The prime objective is to bring back economic activities to normalcy as those were before the coronavirus outbreak, keeping inflation under control, the BB governor said.

To support the targeted 8.2-per cent GDP growth, the credit to the private sector would be adequate, Fazle said.

He, however, asked the banks to ensure the flow of fund to the productive, labour intensive and environment-friendly sectors.

Otherwise, the country may face different troubles including high inflation and surge in non-performing loans, the BB governor cautioned.

‘Even through the central bank has identified the challenges, the monetary policy lacks specification of measures which would be taken to mitigate the challenges,’ said Salehuddin, adding that the policy for FY21 was a conventional one — just the number and figures.

‘Majority of the measures of expansionary monitory policy have already been taken in March and April, and the policy came as it was expected,’ he said.

The policy would not impact much, he said, adding that the central bank could have mentioned how the banks would be encouraged to issue credit to the SME sector as the 9-per cent ceiling on lending rate made it difficult for the banks to issue credit to the SMEs.

Flow of credit to the labour intensive and SMEs must be ensured so that the production of real goods and services increases, he said.

He, however, was doubtful about the government’s and the BB’s ambitions of making the country’s economic activities vibrant as it was before the coronavirus outbreak.

Mentioning the bank rate cut announcement a rational decision, Ahsan H Mansur said that the excessive flow of liquidity in the market must be avoided as such money could lead asset market inflation.

Fund may flow to the non-productive sectors like real estate, housing and stock market, he mentioned, adding that the central bank would have to intervene if such a situation develops, said Ahsan, also the chairman of BRAC Bank.

The money that would be created against the government’s bank borrowing, central bank’s refinance scheme and foreign asset must be utilised cautiously for the productive sectors, he said.

On the government’s bank borrowing target, Ahsan said that the government’s borrowing might increase above Tk one lakh crore.

He also said that the country’s foreign exchange reserve would continue piling up in the coming days and it would be good for the country’s economy.

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