The readjusted policy rate may not be reflected on investment instantly but it will affect the cash liquidity, making credit costly for banks, said bankers as they call for shaking off the fixed lending rate.
In the wake of surging inflation, the central bank on Sunday raised the policy rate, which is also known as repurchase agreement (repo), by 25 basis points to 5%. This means banks now will have to borrow from the central bank at the new rate.
The central bank came up with the policy rate adjustment after 2020 – the last time it had reduced the rate by 50 basis points to 4.75%.
The country's imports have been surging since the beginning of the current fiscal year, as banks have had to pay around $5.5 billion to clear the import bills. The spiralling import has caused a liquidity crisis to banks.
Bankers said the latest repo rate readjustment could reduce borrowing by banks.
Mashrur Arefin, managing director of City Bank, said the clear message is the market has a demand for cash. The raised policy rate warrants an interest rate hike for lending.
"Banks had been lending the corporate clients at 7.50%, which will now go up. Now the government should look at the interest rate, as it is becoming difficult for us to distribute loans at the current rate," he noted.
Golam Awlia, managing director and CEO of NRBC Bank, said almost all banks are facing a liquidity crisis, while the repo readjustment will add to the problem.
"The Bangladesh Bank is now withdrawing money from the market thanks to inflationary pressure. If the withdrawal led to a tightened fund supply, lending will be in trouble. Besides, if the lending rate cap persists, our income will be affected," he added.
Insisting the upcoming months would be tougher for the lenders, he urged the central bank to look at increasing the lending rate.
According to the central bank, banks had Tk231,210 crore excess liquidity in June 2021, which dropped to Tk199,974 crore in March this year.
Zahid Hussain, the former lead economist of the World Bank's Dhaka office, said the new repo rate will slightly increase the cost of banks, as loans with less than 9% interest rate would be affected.
"Raising the policy rate by the Bangladesh Bank is an effort to reduce inflation. This also hints at changes to lending rates or other measures," he noted.
The economist said many central banks abroad raised their policy rates, but their interest rates are fixed by the market.
All their rates increase if the policy rates are raised. However, this is not the case for Bangladesh as we have a ceiling for the lending rate," he added.
Managing director of a first-generation private bank said banks have not adjusted deposit rates after the inflationary pressure as the cost of funds is not affecting them too much. But if the bank spread shrinks, then the lending rate must be increased.
According to the Bangladesh Bureau of Statistics, the inflation rate in April this year stood at 6.29%. The rate was at 5.36% in July last year, and had been ticking up for the next nine months.