The Bangladesh Bank has decided to increase the policy rate, also known as repo rate, by 75 basis points to 7.25% to contain inflation by making money costlier.
The decision was taken at the monetary policy committee meeting held today, with the move considered a key to tackling the raging levels of inflation.
In April of 2020, the repo rate stood at 5.75%, falling to 4.75% at the end of July of the same year.
The rate then began to be hiked from the end of May in 2022, when it was raised to 5%. Another 50 basis point increase was seen in June of the year.
The last hike before October was in July 2023, when it was raised to 6.50%.
The central bank policy rate is the interest rate at which the central bank of a country lends money to commercial banks.
Once the rate is hiked, private banks who borrow from the central bank at the higher rate will have to charge more interest on the loans they make.
As money becomes costlier, borrowing and spending is expected to decrease, dampening demand and hence cooling prices.
Although inflation in September slightly eased to 9.63%, economists say the suffering of ordinary people has not been significantly alleviated given the current market conditions.
The general inflation in August was 9.92%.
But inflation has consistently remained above 9%, significantly affecting the cost of living, particularly for the low-income groups.
Economists attributed the persistently high inflation to internal factors, describing it as largely man-made.
These factors include the availability of cheap credit, among other factors.
For months, economists had called for the central bank to take steps to tackle the rising level of inflation.
Speaking to The Business Standard earlier, Dr Mustafa K Mujeri, former director general of the Bangladesh Institute of Development Studies (BIDS), argued that the government's monetary policy, which has involved borrowing heavily from the Bangladesh Bank to meet the fiscal deficit, was not helpful in reducing inflation.
Printing new money, he said, only served to fuel inflation further.
Dr Selim Raihan, economics professor at the University of Dhaka and executive director of the South Asian Network on Economic Modeling (Sanem), said the government's measures to reduce inflation were not having the desired effect.
He, however, said, the monetary policy in particular had been ineffective in reducing inflation.
Analysts have also pointed out that the government's heavy reliance on bank borrowing due to the chronic shortfall in revenue earnings made fiscal reforms and prudent debt management imperative to reduce further risks of inflation and currency depreciation.
Earlier in June, the Bangladesh Bank had increased the policy rate from 6% to 6.5%.
The policy rate hike will increase treasury bill rates which will push the lending rate up as the reference lending rate is linked with treasury bill rates.
The reference lending rate, also known as SMART (six-month moving average rate of Treasury bill), surged to 7.20% in September, the highest in six months, as Bangladesh stopped money creation through devolvement for deficit financing to curb money supply amid rising inflation.