Cenbank likely to hike repo rate once again

The Bangladesh Bank is likely to hike the policy rate for the second half of the ongoing fiscal year (January-June) in a strategic move aimed at curbing inflation, according to a central bank official. 

As part of this manoeuvre, the central bank is contemplating an increase in the repo rate, the benchmark rate at which banks borrow from the central bank, by 25 to 50 basis points. 

This adjustment could place the policy rate in the range of 8% to 8.25%. In November, the Bangladesh Bank increased the repo rate by 50 basis points to 7.75%. 

Analysts predict a direct impact on the cost of borrowing by the move, as banks are expected to raise interest rates on loans. This shift could render borrowing more expensive for both businesses and individuals, potentially influencing spending patterns and investment decisions.

In a concurrent move, the central bank is mulling over a reduction in the spread between the interest rates of the standing lending facility (SLF) and the standing deposit facility (SDF). 

Officials have indicated that this reduction in the SLF and SDF rates' spread could lead to a more confined corridor. The envisaged change in spread may fall within the range of ±150 to ±175 basis points.

Commercial banks borrow money from the central bank to address their liquidity needs. The interest rate charged by the central bank for these loans is known as the repurchase agreement or the repo rate. If a bank cannot secure enough funds through repo, it borrows money from the central bank at a slightly higher interest rate through SLF. 

Prior to the last July-December monetary policy, SDF was referred to as special repo, and reverse repo was renamed to SDF. Central bank officials explained that these changes were made to shift from a money supply-based monetary policy to an interest rate-based monetary policy.

In the monetary policy announced for the first half of the current fiscal, the repo was raised by 50 basis points to 6.5%. 

However, due to not being able to control inflation by increasing the repo, the policy rate was increased several times in the last six months. Finally, on 27 November, the rate was increased by 50 basis points to 7.75%. 

The increase in the policy rate will lead to a rise in the lending rate, according to managing directors of several commercial banks. 

They explained that when the policy rate goes up, the cost of borrowing from the central bank increases, reducing banks' interest in lending. Consequently, banks will raise the lending rate by increasing the cost of borrowing money. 

The SMART (six-month moving average rate of treasury bills), which serves as the reference lending rate, will keep rising due to the increasing interest on treasury bills, they said. 

To align with a contractionary monetary policy and reduce money supply in the market, the central bank raised the rates of all types of treasury bills by 10-20 basis points on Sunday.

The inflation rate target in the new monetary policy is said to be in the range of 6-7%. The new monetary policy was finalised in the central bank board meeting on Sunday. The central bank will announce this policy on 17 January. 

The overall inflation in Bangladesh stood at 9.41% in December, which was 9.49% in November, according to Bangladesh Bureau of Statistics (BBS) data released on Sunday. 

In the monetary policy for the first half of FY24, adopting a contractionary monetary policy stance tightening money flow to the private sector and lowering the private sector credit growth projection to 11% for FY24 from the previous target of 14.1% set for FY23. 

The monetary policy introduced four key reforms, including the implementation of a policy interest rate corridor, a reference interest rate for lending, exchange rate unification, and a revised method of calculating the gross international reserve in accordance with the Balance of Payment and International Investment Position Manual (BPM6).