BB to hike policy rate by 50 basis points to 9% next week

Bangladesh Bank (BB) is expected to hike the policy rate or repo rate by 50 basis point to 9 percent from the existing 8.50 percent next week to tame skyrocketing inflation.
Inflation hit 11.66 percent in July, the highest at least since fiscal year 2010-11, driven mainly by food prices, reflecting the worsening situation of the purchasing capacity of people, according to the Bangladesh Bureau of Statistics (BBS).
Bangladesh concluded fiscal year 2023-24 with consumer price index at 9.73 percent, much higher than the authorities’ target of 7.5 percent. This was the fifth year that inflation overshot the goal of government.
And the first month of the FY25 showed no sign of easing.
At a press briefing yesterday, BB Governor Ahsan H Mansur said the policy rate or repo rate, at which commercial banks borrow from the central bank, would have to be hiked until inflation cools down.
An increase in the policy rate is expected to lead to bank borrowing turning costlier, for which people will cut down on expenditures, thereby curtailing demand and subsequently bringing down inflation.
“We are going to hold a meeting of the monetary policy committee early next week and hope to announce the new rate later,” BB Governor Ahsan H Mansur told The Daily Star later.
He hoped for the inflationary pressure to come down within seven to eight months. It is expected to come down to 5-6 percent then, he said.
A senior official of the central bank, seeking anonymity, said in the first phase, the policy rate is going to be hiked by 50 basis points.
In an interview with the BBC recently, the newly appointed governor said the rates would be hiked to 10 percent or more in the coming months to tame inflation.
The BB last increased the policy rate on May 8 by 50 basis points to 8.5 percent in line with the prescription of International Monetary Fund (IMF) in its fight against the spiralling prices.
Since inflation has stayed above 9 percent, the BB has been following a contractionary policy stance in its efforts to reduce demand and contain prices. It has raised the policy rate several times since May 2022 to increase the cost of money.
But the BB has been much behind the rest of the world in raising policy rates and making them more potent.
The BB started to increase the repo rate in May 2022 as inflation went up following a sharp increase in commodity prices driven by the crisis brought on by the Russia-Ukraine war. The rate has since been revised upwards.
But the hikes had 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, however, fully withdrew the lending rate cap on May 8 of this year to meet conditions attached to an $4.5 billion loan of International Monetary Fund.
But higher inflation has already brought about a cost-of-living crisis.