The current global trend – central banks are hinting at pulling out of their easy money support in the face of mounting inflation pressures.
The Bangladesh Bank is also following suit, putting an end to the pandemic's easy money era by draining out money from the money market amid a rising inflation.
All kinds of interest rates, which came down to a historic low last year thanks to relaxed monetary tools during the pandemic, have now started to move upward, reflecting a rising demand following the resumption of economic activities.
In the last fiscal year, the Bangladesh Bank had to pump Tk71,000 crore into the money market in the form of buying $9 billion in cash.
However, in the three months of the current fiscal year, the central bank drained out Tk45,000 crore from the money market through sales of dollars and Bangladesh Bank bills.
The central bank's move of lifting money from the money market has already been reflected in reduction of excess liquidity.
The total excess liquidity, which reached a historic high of Tk2.31 lakh crore in June this year, came down to around Tk8,000 crore in a month in July.
The squeezing of money supply and rising credit demand hit all kinds of interest rates, pulling out from the historic low level.
For instance, the yield rate, which was 0.54% on the first auction day of Bangladesh Bank bills on August 9, increased to 2.44% in September.
The rate of long term treasury bills and bonds also jumped to 6.5% in September from 6% in July.
The call money rate also saw a surge as banks came back to the formal market after the central bank strengthened monitoring on inter-bank borrowing at less than 1%, which mainly was flowing to the stock market.
The call money rate surged to 2.17% in September from less than 2% a month back. Borrowing volume in the call money market also increased amid rising demand.
The lending rate, which came down to 6%-7%, a historic low, amid huge excess liquidity, is now on the rise after the central bank put a cap on the deposit rate.
"We were offering a loan at 7% but after raising the deposit rate, we will have to increase lending rate by 0.5% to 1%," said Ali Reza Iftekhar, managing director at Eastern Bank.
All banks revised up their deposit rate to above 5.5% in August after the central bank had ordered banks to pay returns to depositors not less than the inflation rate.
The upward trend of all kinds of interest rates hinted that money will not be cheaper anymore.
When all rates are going up, private sector credit growth has still remained sluggish owing to the 9% lending rate cap.
The private sector credit growth, which hit 7.55% in May, started to grow slowly from June and reached 8.42% in August.
The slow credit growth raised a concern for the Bangladesh Bank because high demand but low credit growth reflects the Kenya syndrome.
Credit growth tumbled in Kenya after its government put a cap on lending rate.
If credit growth does not increase in line with market demand, it will put pressure on inflation, said a senior executive of the Bangladesh Bank.
Bankers are now selective in lending because of a rise in deposit costs, said Iftekhar, who is also the chairman of ABB (Association of Bankers Bangladesh).
It will be difficult to achieve the 14.8% credit growth ceiling set in the new monetary policy owing to the lending rate cap, he added.
The economic rebound also supports the rising demand, keeping money rates upward.
Large and medium-scale manufacturers witnessed a low growth of 1.80%, while the small ones registered only 1.39% in FY20 because of the pandemic shocks.
In FY21, all businesses made a turnaround—large and medium industries grew by 5.77% and small ones by 6.56%, reflecting the recovery strength, according to Bangladesh Bank data.
Industrial production in both large and medium-scale industries observed a hefty year-on-year growth of 73.20% in April in FY21, mainly because of base-effects as production declined by 23.47% in the same month a year ago.
The resumption of economic activities across the world after a series of pandemic-induced preventive measures boosted large and medium scale manufacturing output growth in April this year, said the central bank in its quarterly report for April-June 2021.
Why Bangladesh Bank is turning back from easy money support
Inflation is the main concern that prompted the Bangladesh Bank to squeeze money supply.
The point-to-point inflation rate jumped by 0.18 percentage point in August to 5.54%, according to a report released by the Bangladesh Bureau of Statistics (BBS).
The inflation was 5.36% in July, 0.28 percentage points lower than in June.
The inflation rate for both food and non-food items increased last month. And it increased in urban and rural areas too.
The inflow of easy money also contributed to inflation, said a senior executive of the central bank.
A huge push of reserve money in the banking system by the Bangladesh Bank to handle liquidity crunch during the pandemic situation coupled with a large inflow of foreign currency and a lack of demand for loans helped excess liquidity jump to a historic high.
The easy money was diverted to the stock market, putting pressure on inflation amid sluggish credit growth.
The Bangladesh Bank already fined four banks for overplaying in the stock market with cheap money.
The central bank in its latest quarterly report expressed fear that some inflationary pressure may build in the coming months, thanks to Covid-led global supply chain disruption and the continuation of global price hikes.
In observations, the central bank said the country's economy started rebounding from the Covid-19 fallout with timely implementation of stimulus packages and continued fiscal and extraordinary monetary policy support.
The speed of a broad-based economic recovery is likely to get momentum in the near future in the backdrop of declining Covid infections, extended vaccination programme, growth supportive fiscal and monetary policies and optimistic outlook of exports, it noted.
The global rating agency Fitch Solutions has revised its growth forecast for Bangladesh to 6.3% from the previous 5.5% for the current fiscal year as vaccinations improved economic recovery.
The rating agency sees improvement in private consumption and strong export growth, which will accelerate the country's growth momentum, according to its report released recently.
Fitch has revised up its forecast of private consumption growth to 8.5% for FY22 from 5.5% previously.
How global central banks are acting
Globally, central banks are indicating a dial back of their emergency support in the face of mounting inflation pressures.
In the last week, the US Federal Reserve signalled it would start paring its massive bond-buying as soon as November and the Bank of England hinted for the first time that it may raise interest rates this year. Norway became the first developed economy to hike and borrowing costs also increased in Brazil, Paraguay, Hungary and Pakistan.
Rising inflation is behind this move as the Organisation for Economic Cooperation and Development expected that inflation to peak towards the end of the year at 4.5% on average in the Group of 20 major economies fuelled by recovering demand for goods and supply chain strains.