The Federal Reserve's decision to hike its benchmark interest rate to a 28-year high will have a significant impact on the world economy besides the US, and Bangladesh also will feel the heat from it.
The United States is moving away from the quantitative easing policy adopted by its government during the coronavirus pandemic and is heading towards a tightening policy, aiming mainly to regain control over soaring consumer prices by reducing domestic demand.
As a result, interest rates will rise in the country in the first place. As the flow of money into the hands of the people decreases, the amount of demand will decrease. Commodity prices may also come down a bit.
The US wants to raise $40 billion a month from the market by implementing this decision. Huge amounts of dollars will flow to the US from emerging and developing countries. As dollar investment in the US becomes profitable, equities, portfolios and even foreign direct investment will decline in other countries.
Once the demand for the dollar increases globally, the value of the local currency of almost every country will decrease. Countries that will be able to reduce their domestic demand and imports in line with the depreciation of their currency will be able to keep inflation under control.
It is true that the world economy is largely overheated right now. In almost every country, the demand is higher than the supply, so product prices are on the rise.
As the US is the largest market for Bangladeshi products, the rise in interest rates in the country will have an impact on Bangladesh as well. First, like other countries, Bangladesh will suffer from a crisis of dollars. And the cost of transporting goods in dollars will increase the cost of both imports and exports.
And if the domestic demand declines in the US, export orders for our products may decline. At the same time, prices of export products may go down a bit. Undoubtedly, this is bad news for our exporters, especially those in the readymade garment sector.
In order to prevent the domestic economy from being affected by the crisis, we must respond efficiently to this decision by the US. There is no alternative to raising interest rates in our country as well. It would be better if the 9% cap on lending rate could be lifted completely. And if not, the cap can be raised by at least two-three percentage points.
It is not possible to deal with such risks through monetary policy alone. The government has to take some tightening measures under the fiscal policy.
It goes without saying that the value of money will further depreciate against the dollar in the future. In order to reduce this pressure, the government has to take austerity measures. Imports of less important products need to be controlled strictly.
Ahsan H Mansur is Executive Director of Policy Research Institute