The Building Initiative Leading Development (BUILD), a public-private debate platform, has criticised new monetary policy, saying that only high policy rate cannot contain inflation without taking into account other issues like supply-side constraints and eroded depositors’ confidence.
In a reaction on Wednesday, the think thank said while announcing the MPS for the second half of FY25, the Bangladesh Bank should have considered these key factors affecting inflation to ensure perfect competition in the economy and ensure good governance.
The central bank has announced a contractionary monetary policy keeping the policy rate intact at 10 percent and private sector credit growth target at 9.8 percent, aiming to cut inflation, stabilise the foreign exchange market, rebuild forex reserves, and tackle the rising NPLs in the banking sector.
The Build said the objectives are okay but there were expectations that other important policy tools will also be utilised to address inflation to attract investment and thus creating employment, adding that the high policy rate will increase production cost of the industries.
“The private sector expected a lower interest rate for getting loans from the banks for existing and for the new investment. Keeping the policy rate at 10 percent could result in higher production costs, burdening import of raw materials, increased wage, high cost of machinery inducing policy-driven inflation that contradicts the strategy to reduce inflation,” the BUILD said in a statement.
Citing its own study, the organisation said the inflation rate still remains high at 10 percent as the supply side is not disciplined and there is a dominance of the extortionists at the field level.
It pointed out that in the existing supply chain, only 8-9 entities are controlling the supply of the import of consumption goods creating an oligopoly market structure, while the role of the Competition Commission is not visible to address the market anomalies.
BB is managing the foreign exchange market through a crawling peg exchange rate mechanism. It has stopped intervening in the interbank market to stabilize the exchange rate, boosting remittance inflows and exports.
However, trading in the spot market under the crawling peg mechanism is not viable for the banks because of the fixed rate which is below other rates as they trade through cross-country currencies, BUILD says.
The government borrowing may reach up to Tk5 trillion, compared to the revised Tk99,000 crore, due to a shortfall in revenue of Tk58,000 during the first half, it said, adding that local-source deficit financing will be critical for the state coffer, as the deposit scenario in the banking sector shows negative signs.
It also stated that the BB’s broad-based initiatives to streamline the financial sector is a good move but a specific timeline could give a signal of hope for discipline in the banking and financial sector.
