The Bangladesh Bank has opted to pump more money into the economy despite an uptick in inflation, but vowed to keep a close watch on where that money was going.
In spite of huge surplus liquidity in the banking system that has already created a price pressure risk, the Bangladesh Bank has felt the need for further expansionary policy to overcome the challenge of Covid-19 and the accompanying lockdown impact. This is meant to support investment and employment generation.
The central bank, however, will remain highly vigilant to ensure the quality and purpose of loans, according to the new monetary policy announced on Thursday for the current fiscal year.
Even though there is a need for tightening the money supply, the central bank has continued with policy relaxations considering the ongoing pandemic, said the monetary policy statement.
It, however, hinted that the central bank may take policy measures anytime to tackle excess liquidity based on inflationary pressures.
Inflation is already on the rise. The inflation rate was recorded at 5.56% in FY21, overshooting the government's target of 5.40%.
In June this year, inflation was 5.64% – the highest in the last eight months.
"It appears that owing to the ongoing expansionary and accommodative monetary and fiscal policy stance, the banking system has already been inundated with historically high levels of surplus liquidity, although the growth of some other monetary and credit aggregates remained relatively slow due mainly to ongoing Covid-19 related uncertainties," reads the monetary statement.
"In case of any unexpected price pressure development or formation of any erratic asset price bubbles due to the presence of ample excess reserves in the banking system, the BB will take appropriate policy action anytime if the situation warrants."
The monetary policy stance of the central bank for FY22 is designed to continue the ongoing expansionary and accommodative mode supporting the disrupted economic recovery process while maintaining appropriate cautions for overall price and financial stability, the statement adds.
It was necessary to lift monetary policy relaxation gradually but not right now
"Understandably, the BB intentionally refrained from conducting any liquidity sterilisation action as a part of its employment and investment supporting its pro-growth expansionary policy stance considering the Covid-19 pandemic situation and maintaining safe positions of the key anchoring monetary and credit variables and supporting interest rate rationalisation efforts on lending."
Looking ahead, the BB will remain vigilant, continuously monitoring commodity and asset price developments along with the progress in money as well as foreign exchange markets, and will take appropriate policy measures as required, according to the monetary statement.
Excess liquidity in the country's banking sector stood at Tk2.31 lakh crore as of June this year – significantly higher than Tk1.39 lakh crore in the same month of last year.
The persistence of surplus liquidity in the system resulted in a sharp decline in the call money rate in the interbank money market recording a significant decline from 5.01% in June 2020 to 2.25% in June this year.
The lending rate also came down below 9%, which the central bank sees as a blessing for businesses.
"Virtually, banks are now operating almost all of their lending activities well below the 9% interest rate cap and the existing lower trajectory of lending interest rate along with robust growth in deposits can be a blessing for enhancing the private investment and economic activities during the post COVID period," says the monetary statement.
Although the private sector credit growth was 8.4% in FY21, the central bank wants to take it to 14.8% this year.
The credit growth fell short of target in the last two consecutive fiscal years.
"The BB's cautiously designed expansionary and accommodative monetary policy stance alongside the implementation of ongoing various stimulus packages on top of low base effect is likely to augment the private sector credit growth to its programme level."
Rizwan Ahmed, president of the Dhaka Chamber of Commerce and Industries (DCCI), said the target to raise private sector credit growth to 14.8% is not realistic considering the current economic slowdown.
Almost 90% of businesses are operating in reduced capacity and scope, and the intention of new trading and industry investment is slimmer, he observed, adding if the second wave-induced economic shocks amplify, the private sector credit target will be behind the target.
Citing experts and stakeholders' opinions, Bangladesh Bank Governor Fazle Kabir in his written speech said it was necessary to lift monetary policy relaxation gradually but not right now.
He, however, admitted the risk of excess liquidity flowing to unproductive sectors.
Placing emphasis on the proper use of funds, he said appropriate prudential measures are required to prevent any sort of misappropriation.
"Thus, this monetary policy will try to proactively arrest any deterioration of aggregate demand by supporting new investment and employment generation, and help create enabling conditions for businesses to normalise production and supply chains streamlining the proper use of the fund," the governor said.
The Bangladesh Bank in its recent primary observation found that low-cost stimulus loans are being diverted to unproductive sectors.
In this situation, the central bank has sent a letter to banks asking them to strengthen internal monitoring to make sure stimulus loans are used in the targeted sectors.
The Bangladesh Bank governor said the basic challenges that the central bank may encounter in the coming months are the restoration of full normalcy in life and extending required fund flow to the production pursuits, especially those that have become inoperative causing some degree of job and income losses.
To this end, the BB will attach importance to the full implementation of the government's stimulus packages alongside strengthening its own refinancing windows in the coming days.
For this purpose, the central bank will consider adopting all possible policy options for encouraging new entrepreneurs and for generating new employment opportunities which include: continuation of the ongoing refinance policy with more focus on micro, small and labour-intensive medium enterprises especially for the eradication of urban poor existed in the transportation, tourism, hospitality, healthcare and small businesses; full operationalisation of its credit guarantee scheme to expedite CMSMEs financing, particularly towards the light engineering cluster and value chain, and women entrepreneurs' development; permitting banks and financial institutions for opening technology-driven sub-branch in the rural remote areas by engaging their own-recruited minimal workforce for creating quality jobs and enhancing financial inclusion alongside ensuring proper safety and security; and bringing the education sector, perhaps the most affected sector due to the Covid-19 pandemic, to the refinance scheme so that both the needy teachers and the students can get their minimum required amount of loans for purchasing necessary electronic equipments, and smart devices, the governor said.
The Bangladesh Bank unveiled its monetary policy for FY22 on its website on Thursday.