Bangladesh Bank may extend contractionary MPS to tackle high inflation

The stubbornly-high inflation in the economy raises concerns about 'unanchored inflation expectations', the central bank’s latest Monetary Policy Review 2022-23 document noted.

"A shift towards an interest rate-focused monetary policy framework could enhance the effectiveness of the BB's monetary policy," the review document said.

The bank needs to proactively exercise caution and vigilance to anchor inflation expectations and limit the second-round effects of inflation, it said.

The sharp depreciation of the exchange rate and high production and transportation costs kept domestic inflation elevated amid improvements in the supply situation and declining global commodity prices, it noted.

It observed that the headline consumer price index-based inflation hit 9.24 per cent in April this year and surged further to 9.94 (point-to-point) in May.

The 12-month average inflation steadily increased to 8.64 per cent in April 2023 from 6.15 per cent in June 2022, significantly exceeding the target of 7.50 per cent for FY23.

Credit growth to the private sector moderated to 12.03 per cent in March this year from 13.66 per cent in June last year, primarily due to a slowdown in trade-related credits and weak investment demand.

Amid the bank’s increased net selling in the foreign exchange market, a sudden rise in cash withdrawals from banks by depositors, and a sluggish deposit growth, the banking system experienced liquidity stress, leading to an upward trend in interest rates in the money market during this period, the review added.

ALCHEMPro News Desk (DS)