The banking system needs liquidity.
Disruptions to economic activities domestically and the likely slowdown in remittances is bound to affect deposit growth. The moratorium on loan repayments until June will stop reflows, thus straining liquidity further.
Measures to augment liquidity were therefore urgently needed.
The reduction in the Cash Reserve Ratio and the policy rate are steps in the right direction. Earlier the Bangladesh Bank also announced quantitative easing by purchasing Treasury bills and bonds from the banks.
The demand for credit will most likely weaken, but businesses may still need to borrow to meet their operating expenditures, even when closed, particularly for the salaries since their revenues are likely to be badly hit.
Household demand for cash is also most likely to have increased already, driven partly by panic and partly by income losses which is probably forcing many to draw down their savings in the banks.
The government will also need additional liquidity if it wants to provide cash assistance to a vast number of poor and low income workers in the informal and formal sectors.
The demand for repo funds appears to have spiked recently. The outstanding stock of repo operations increased from Tk9,278 crore on March 3 to Tk23,850 crore on March 23.
Under such circumstances, maintaining confidence in the banking system is critical. These measures will help banks supply cash on demand to their clients and help contain their interest expenses.
What we do not need at this stage is a run to the banks because depositors think banks may run out of liquidity or that banks may themselves become bankrupt.
The Bangladesh Bank deserves to be commended for such a timely response. Most central banks have taken similar measures.
Given a general contraction in consumption demand, the inflation risk due to monetary expansion is subdued and worth taking to keep the country's payment system functional.