- BB monetary policy and policy stance remain expansionary for FY21 with all growth support without hampering inflation target of 5.4%
- BB proposes to cut in overnight Repo rate from 5.25 percent to 4.75 percent to make funds available to banks at cheap price
- Reverse Repo rate cut from 4.75 percent to 4 percent
- Bank Rate unchanged for 17 years reduced from 5 percent to 4 percent
- Monetary policy faces risk factors in terms of COVID-19, price volatility, global economic downturns, floods and cyclones
- Projected output growth is found to be on target if Covid situation improves and global and domestic economy recovers
- Significant inflationary pressure not expected. FY21 inflation range to be 5.04 percent to 5.93 percent.
- Deficit in current account balance is expected to slightly deteriorate
- Admits that remittance might not be sustainable
- If NPL cannot reduced it would have long-term bad impact
- Taka remains slightly overvalued
- Expects stocks to rebound in view of supportive monetary policy
- Money velocity may fall further in FY21 for Covid-19
- Public sector credit to expand by 44.4 percent and private credit by 14.8 percent
The Bangladesh Bank on Wednesday announced an expansionary monetary policy for the fiscal year 2020-21 that aims at pumping cheaper money into the economy for the post-pandemic recovery.
As part of that objective, the central bank went for a 50 basis-point cut in its overnight repo rate to make cheaper money available to the banks for lending.
At the same time, it has cut the reverse repo rate by 75 basis points so that it can also take money from banks at a lower rate and thereby influence the market in a downward direction.
Both the steps will make funds less costly.
"Moreover, the bank rate which remained unchanged for the last 17 years [since 2003] has also been considered to be reduced from five percent to four percent to rationalise it with the current interest rate regime," the central bank's monetary policy statement (MPS) said.
A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often in the form of very short-term loans.
"The Bangladesh Bank's monetary policy stance and monetary programmes for FY21 are essentially expansionary and accommodative for all growth support needs without impairing attainment of the targeted inflation containment," it said in its monetary policy statement.
The previous overnight repo rate was 5.25 percent which will now be 4.75 percent and reverse repo rate was 4.75 percent and reduced now to four percent.
A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
Central banks use reverse repos to add money to the money supply via open market operations.
"We welcome this proactive and expansionary monetary policy," said Dr Md Mizanur Rahman, member at Bangladesh Securities and Exchange Commission.
"We need to keep slashing the repo rate until it reaches the target of four percent. That will be consistent with the government's vision of providing adequate liquidity to households and businesses," he said.
This is now more important as flooding has aggravated the economic slowdown caused by the Covid-19 pandemic, he added.
It is a very appropriate and timely policy response from the Bangladesh Bank, said Shahidul Islam, managing director of VIPB Asset Management Company.
He said they should now make this policy fully operational by using their repo window and other tools. If the Bangladesh Bank keeps the short-term, risk-free rate at 4.75 percent, there should be an adequate flow of private sector credit, and the markets of financial assets and real assets should get a much-needed respite.
"The prime objectives of the monetary policy stance and monetary programmes for FY21 are the economic recovery from the adversity of the Covid-19 pandemic and rehabilitation of the production capacity of the economy – including the restoration of the normal livelihoods of the people along with maintaining dual goals of price stability and quality growth," the monetary policy read.
Lending capacity will increase significantly after the reduction in policy rates comes into effect, said Bangladesh Bank Governor Fazle Kabir in a written speech on monetary policy announcement, which was posted on the central bank website.
However, he raised concerns saying that default loans and inflation may rise if loans do not go to the productive sector.
Addressing five risk factors to the attainment of the monetary policy goals, the governor said although there are signs of gradual improvements in people's movement and economic activities, the uncertain length and depth of the Covid-19 pandemic in the coming days is considered to be the number one risk factor in attaining the monetary programme objectives of FY21.
Secondly, further aggravation of the global recessionary economic condition due to the lingering novel coronavirus pandemic, along with the volatilities in oil price and ongoing geopolitical tensions in the Middle-East, might have a serious negative impact on future export earnings and wage earners' remittance inflows to Bangladesh.
Thirdly, the Bangladesh Bank's expansionary and accommodative monetary policy stance along with the implementation of the various stimulus packages in the economy may intensify the unexpected inflationary pressure through creating price bubbles in the near future.
Fourthly, the present non-performing loan (NPL) situation in the banking industry of Bangladesh – that has markedly improved backed by the recent rescheduling facility – may soon disappear due to worsening business conditions on top of the capitalisation of interest along with principal obligations payable in the future.
Finally, natural calamities – such as floods and cyclones – always remain a potential risk factor because of the country's nature-dependent agricultural sector. Some parts of the country are already hit hard by the seasonal floods, seriously affecting livelihoods of the people in those affected areas.
In the monetary statement, the Bangladesh Bank does not see significant inflationary pressure under the current subdued economic situation inflicted by the Covid-19 pandemic.
In the MPS, the central bank projects the ranges of average general CPI inflation between 5.04 and 5.93 percent for FY21 and a range of five to 5.94 percent for FY22.
The private sector credit growth, which came down to 8.61 percent in June, is projected to improve to 14.8 percent by FY21 – a similar target was set in the last fiscal year.
"The central bank's expansionary and accommodative monetary policy stance along with the implementation of the various stimulus packages on top of base effect are likely to augment the private sector credit growth to its programme level," said the policy statement.
Addressing the most burning issue of the lending rate cap, the central bank said feedback from selected economists, policymakers and stakeholders have raised some concerns over the issues developed recently in the financial sector of Bangladesh.
They argued that the central bank's policy direction for rationalising interest rates/profits by implementing a nine percent lending rate cap might seriously hamper the growth of small and medium-sized enterprises whose monitoring and management costs are relatively higher in nature.
The recent reduction in intermediation spread, a marked efficiency gain of banks, will be difficult to sustain if the NPL burdens – most often cited as a primary reason behind the downward stickiness of lending interest rates – are not contained.
The central bank's recent policy measures of allowing banks' rescheduling of default loans with two percent down payments and an exemption of borrowers from rescheduling their bad loans have helped significantly improve the latest NPL situation.
However, the Bangladesh Bank raised concerns that the NPL situation of banks might deteriorate in the longer-term if the practices of transparency, accountability, and good governance are not ensured effectively.
Against the backdrop of increased spending promises by the government, backed by the central bank's expansionary policy stance in combating the Covid-19 fallout, public and the private sector credit is projected to grow by 44.4 percent annually.
The expected increased public sector credit growth is partly attributable to the fact of shallow non-bank borrowing options mainly due to slow sales of national savings certificates in the recent past, which is very likely to continue in the coming months.
According to the monetary statement, the government has set the target of real GDP growth at 8.20 percent for FY21 considering that the ongoing novel coronavirus situation will improve soon and the economy will rebound strongly following a V-shaped path.
Based on the pandemic-related uncertainties and revised growth of FY20, the Bangladesh Bank's research team projects a possible scenario, instead of calculating a point estimation, of the real GDP growth for FY21.
Anticipating that the ongoing pandemic situation will improve soon and the possible economic recovery at home and abroad will follow immediately aided by the successful and timely implementation of the stimulus packages taken by the government and the central bank, the projected output growth scenario is found to be consistent with the government target.
Addressing the employment generation issue, the Bangladesh Bank said it took a series of instant and proactive policy initiatives to minimise any possible economic losses due to the Covid-19 pandemic.
The central bank has used its available monetary policy instruments – such as: cash reserve ratio (CRR), repo facility (interest rate and tenor), refinancing facility, and other monetary condition easing initiatives – to inject necessary liquidity into the market. This includes the recent formation of a credit guarantee scheme to support cottage, micro and small enterprises that lack adequate assets to pledge for bank loans.
All these policy measures are taken to help generate employment opportunities in the agriculture, industry and services sectors so that pandemic-related economic losses are rapidly recovered.