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BB to keep policy expansionary

Sajjadur Rahman
Bangladesh Bank (BB) will continue to follow expansionary monetary policy to drive growth and create jobs in line with the agenda of the new government, central bank officials said yesterday.
"The central bank will prioritise an uhhindered flow of credit to productive sectors to support a growthpromoting policy,” a BB economist told The Daily Star.
The semi-annual monetary policy to be announced for January-June by the end of next week marks agriculture, SMEs and the rural economy as the prime targets, the economist said.
Credit to unproductive sectors, such as trade financing, will be discouraged in the new policy. Price stability will be another focal point in the policy.
Officials said die BB had been meant to announce the policy earlier this week, but was delayed to incorporate the ideas of the new government formed on Tuesday.
In its election manifesto, the Awami League vowed to curb inflation and poverty by stimulating domestic growth.
The country’s monetary policy works indirectly by influencing the costs and availability of credit and
money. Fiscal policy (government expenditure and taxes), on the other hand, impacts aggregate spending directly.
The central bank last announced the monetary policy in July last year, which prompted the International Monetary Fund to recommend a tight policy to rein in inflationary pressure.
An expansionary monetary policy lowers shortterm interest rates to stimulate investment and consumption. A contractionary monetary policy yields the opposite effects.
BB officials said measures would be meant to ensure credit to the productive or manufacturing sectors to make the policy growth -oriented and employment-supportive.
But commercial banks and other financial institu-
tions are increasingly financing die unproductive sectors, such as trade financing.
About 50 percent of their credit was channelled into trade financing although it had been discouraged in the last policy stance, officials said.
"Measures such as imposition of higher capital charge in the form of higher general provision requirement on such loans may be considered in the new policy,” another official said.
On controlling inflation, the official said the policy would underscore an increase in the domestic production base of food grains by providing easy credit to agriculture.
Thanks to the falling prices of fuel and essential commodities on the international market, inflation at home may ease furdier.
The price of oil that reached $147 in the middle of 2008 has now come down to $50 a barrel.
Prices of other commodities, including rice, wheat and edible oil have also come down significantly on the world market, giving the new government an enough breather to tackle inflation.
The CPI inflation that persisted in double-digits for most of the period since the middle of 2007 slipped to 6.1 percent in November 2008 mainly because of a fall in the prices of commodities.
"Still, the BB has to perform a difficult balancing act between stimulating the economy and controlling inflationary pressure," said the official, who is involved with the monetary policymaking.
sajjad@thedailystar.net