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BB raises policy rate at sharpest pace in a decade

Borrowing to get costlier as interest rate upped by 75 basis points to 7.25%
MD MEHEDI HASAN, AHSAN HABIB and SOHEL PARVEZ
Amid criticisms over the delay in squeezing money supply, the Bangladesh Bank yesterday made borrowing costlier as it raised the policy rate by 75 basis points to 7.25 percent to step up its fight against inflation.
This is the sharpest pace of rate increase in at least a decade, said a central banker. This was the seventh hike in the past 18 months as consumer prices have remained at an elevated level.
Average inflation rose 9.63 percent in September, way above the central bank’s target of 6 percent for the current fiscal year.
The monetary policy committee of the Bangladesh Bank decided to raise the policy rate, also known as the repo rate. It comes into effect today.
The policy rate is a powerful arm of the monetary policy of the central bank as it can regulate the country’s money supply, inflation levels and liquidity.
Commercial banks borrow money from the central bank at the repo rate. When the central bank increases the repo rate, the interest rate of loans and deposits of commercial banks also goes up.
The last time the BB raised the rate came in June when it went up by 50 basis points to 6.50 percent.
But the BB has been much behind the rest of the world in raising policy rates and making them more potent.
For example, the Federal Reserve of the US and the European Central Bank kept hiking policy rates in their fight against record inflation throughout last year and this year.
The US has raised interest rates to the highest level in 22 years to stabilise prices and make borrowing costlier. It has raised the rate 11 times since 2022.
As a result, annual inflation in the world’s largest economy was expected to have reached 3.6 percent in August, much lower than the June 2022’s peak of 9.1 percent.
Similarly, the eurozone inflation halved from an all-time high of 10.6 percent in October last year to 5.3 percent in August this year.
The BB started to increase the repo rate in May last year as inflation went up following a sharp increase in the commodity prices driven by the crisis brought on by the Russia-Ukraine war. The rate has since been revised upwards.
But the hikes have not yielded the expected results as funds were still cheaper owing to the 9 percent interest rate ceiling, which had been in place since April 2020.
The central bank withdrew the lending rate cap in June and introduced a new interest rate regime to meet conditions attached to the International Monetary Fund’s $4.5 billion loan. But higher inflation has already brought about a cost-of-living crisis.
As per the central bank’s new formula, banks can impose a 3 percent margin on the six-month moving average rate of treasury bills, abbreviated as SMART.
The SMART was 7.20 per cent in September and the same rate will be applicable in October, up from 7.14 percent in August.
Due to the rise in the policy rate, the highest rate of standing lending facility would be 9.25 percent from 8.50 percent and the rate of standing deposit facility would be 5.25 percent from 4.50 percent, said a central bank notice yesterday.
Ahsan H Mansur, executive director of the Policy Research Institute, said the policy rate hike will work only if the central bank allows the lending rate to move up.
“Otherwise, it will not be able to curb the inflationary pressure.”
He thinks the policy rate will have to be raised gradually for several months in a bid to tame the inflation rate and stabilise the exchange rate.
The rising interest rate may hurt investments but the In The