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The monetary policy is expected to be unveiled at the end of July.

The IMF said monetary policy should remain data-driven, and the BB should cautiously commence the easing cycle based on solid evidence that current and projected inflation is declining to the target range of 5-6 percent.

“For effective policy transmission, it is critical that retail interest rates continue to be set freely by banks, based on risk-return considerations, and that BB avoids unsterilised liquidity injections into weak banks that lead to excessive softening of government debt yields and, potentially, of broader financing conditions.”

The multilateral lender, referring to the relaunch of the market-based exchange rate regime in May this year, said the BB should stand ready to tighten monetary policy to increase the interest rate differential if significant overshooting of the exchange rate occurs amid shallow forex liquidity.

“Comprehensive and continuous implementation of the new exchange rate regime remains a crucial transitional step towards full exchange rate flexibility,” said the IMF report released by the end of last month.

“It is essential for facilitating smooth external adjustment, preserving foreign reserves, and improving the functioning and liquidity of the FX market.”

The IMF said exchange rate parameters should be set based on macro-fundamentals relative to a basket of currencies, with a daily operational exchange rate band set against the US dollar.

“Banks should be permitted to quote freely in the FX market to facilitate a market-based exchange rate. To achieve this, BB must refrain from moral suasion of banks and avoid regulatory measures that restrict free quoting.”

The Fund said forex interventions must be auction-based. “A transaction-based reference exchange rate for client and interbank markets needs to be published continuously.”

The report said steady progress in modernising the monetary policy framework remains critical to ensure the transition to a forward-looking monetary policy.

“A two-staged transition to a fully flexible exchange rate system and an interest-rate-based flexible inflation targeting framework is a priority,” it added.