Monetary Policy of Bangladesh Bank A Review on Inflation in Control -By Md. Nahidujjaman
Monetary policy is immensely important for an economy as it influences different macroeconomic variables and work as tool for government to take control of the economy. It also plays vital role in controlling the supply of money to ensure price stability and general trust in the currency.The Economic Times defines monetary policy as “the macroeconomic policy laid down by the central bank,” which manages interest rates, money supply, and functions as the demand side of economic policy to affect inflation, consumption, growth, and liquidity. The central Bank of Bangladesh known as “Bangladesh Bank” is the sole authority to take monetary policy on behalf of the government of Bangladesh. It issues currency and regulates other private banks. It declares its monetary policy twice a yearnamely in January and July but it can change its policy anytime when it feels necessary. The central bank of Bangladesh is not an independent authority like Federal Reserve in USA , so the driving force to take monetary policy is usually market information and judgement of the policy makers.
The main objectives of monetary policy of Bangladesh Bank are:
n Price stability both internal & external
n Sustainable growth & development
n High employment
n Economic and efficient use of resources
n Stability of financial & payment system
Like all other central banks BB uses some tools to implement monetary policy in the economy and produce the intended result.The tools and instruments for implementation of monetary policy in Bangladesh are
n Bank Rate,
n Open Market Operations (OMO),
n Repurchase agreements (Repo) & Reverse Repo,
n Statutory Reserve Requirements (SLR & CRR)
On 26 July Bangladesh Bank declared its monetary policy for the first half of fiscal year 2017-18. It is the first time Bangladesh Bank has taken its monetary policy since governor FazleKabir took his chair. The governor has a fresh start with new monetary policy for the first half of current fiscal year aiming to contain inflation while achieving its growth target and increase employment. It’s very crucial for the current government as a fresh general election is right around the corner. Bangladesh is one of the fastest growing economies of world and its 7.24 percent GDP growth rate is truly remarkable. Bangladesh aims to achieve the status of being in the list middle income countries by 2021 and with that keeping in mind Bangladesh needs to sustain current growth rate to achieve its goal. But achieving the high and ambitious growth rates has upward inflationary pressure which necessitates trade-off between these two goals. GDP growth rate target of Bangladesh is 7.4 percent and its inflation target is 5.5 percent for the current fiscal year 2017-18. According to BBS inflation was 5.94 percent in last June and 5.54 percent in last year at the same time. So it will be really difficult to curb inflation within its target. There is also growing concern for food inflation as it has been doubled in the rural area to 7.2 percent in June this year from 3.44percent a year earlier. In urban area food inflation was 8.21 percent in June and 6.02 percent a year earlier.
Bangladesh Bank’s report shows that it has largely achieved its key monetary target in FY17. It has been able to slow down broad money (M2) growth rate at 11.7 percent in May17 which is below the target ceiling of 15.5 percent. Private sector credit growth rate is 16 percent calculated in May17 which is slightly lower from its fiscal year-end target. Public sector credit growth rate is 12.1 percent which was 16.1 percent last year. Government has sold more National savings certificates it planned, which caused government’s net borrowing to decline. Export grew 1.7 percent in the last fiscal year which is the slowest in last 15 years and remittance fell 14.5 percent. According to World Bank inflows from workers abroad are equal to some 6 percent of GDP. This downward flow of remittance may slow down the pace of GDP growth rate. Bangladesh Bank has decreased average reserved money rate to 12 percent which seeks to have contractionary effect on monetary policy. Taka appreciated against dollar which affected export negatively. Bangladesh Bank bought that surplus from interbank FOREX to cause taka to depreciate. Depreciation of taka has positive effect on export.
Bangladesh is one of the fastest growing economies of the world and by using this momentum it’s aiming to become middle income country by 2021. But in recent monetary policy it has given much priority on controlling inflation keeping mind the general election ahead next year. To hit that target government has brought down average reserve ratio and aiming to keep that within 12 percent in FY18. This shrink in reserve ratio managed to lower the broad money growth (M2) to 16 percent
In FY17 BBS recorded average inflation rate 5.44 percent which is well below the target ceiling. 5.8 percent. Government aims to keep inflation within 5.5 percent in first half of FY18. Data showing that due to contractionary monetary policy inflation drops from 5.94 percent in June to 5.57 percent in July (point to point basis). 00
Though current policy has successfully brought down in first month but ultimately to control inflation keeping pace with this outstanding growth rate of more 7 percent doesn’t seem to be an easy deal. Moreover occurrence of natural disaster has already made this task difficult. Flood in last July which inundated almost one third of the country has a devastating impact on the economy. According to report it has directly affected more than eighty million people. Also there is influx of refugee coming from Myanmar following genocide of Myanmar Army on Rohingya Muslims. According to UN around 4, 50,000 people migrated to Bangladesh since the violence erupted.
Recent data showing food price is showing increasing trend while non food price is decreasing. It would be quite challenging to curb price hike in food amidst these external and unintended shocks in recent time. If this continues like this government monetary policy target to keep inflation in control may end in no result.
The writer is an undergraduate student at the University of Dhaka.