Bangladesh Defense
Saif
Senior Member
- Jan 24, 2024
- 21,435
- 9,743
- Nation
- Residence
- Axis Group
Will tight monetary stance alone deliver?
In an economy exposed to fast-changing global energy prices, exchange-rate pressures, inflation and uncertain growth, waiting six months to reassess monetary conditions could prove too long. So, the Bangladesh Bank (BB)'s new three-month review cycle should enable the central bank to respond
Will tight monetary stance alone deliver?
In an economy exposed to fast-changing global energy prices, exchange-rate pressures, inflation and uncertain growth, waiting six months to reassess monetary conditions could prove too long. So, the Bangladesh Bank (BB)'s new three-month review cycle should enable the central bank to respond quickly to emerging risks. Against this backdrop, its maiden quarterly Monetary Policy Statement (MPS) for October-December 2026 is a continuation of the contractionary monetary regime by retaining the policy rate at 9.50 per cent. The decision is understandable. Headline inflation, though easing to 8.26 per cent in August, is still high, while non-food inflation remained at 9.32 per cent. Worse still, the recent fuel-price hike and the new national pay scale threaten to add fuel to cost-push inflation. Evidently, the BB is walking a tightrope between combating stubborn inflation and preventing economic activity from slowing further.
But the question is whether reviewing the monetary stance more frequently would help the policy achieve its objectives. The central bank reduced the repo rate from 10 per cent to 9.50 per cent in July to support investment and private credit. Yet private-sector credit growth stood at 4.75 per cent in August, remaining below 5.0 per cent for six months and far short of BB's 6.80 per cent target for December. This suggests that changes in the policy rate transmit quickly to market lending rates, but do not necessarily translate into stronger credit demand and contribute to investment or production. High borrowing costs are one part of the problem. Energy shortage, weak business confidence, depressed demand and banks' reluctance to lend to risky borrowers are equally important. So, the central bank's cautious stance is defensible, but caution alone cannot revive the real economy. More important than frequent policy changes in monetary policy or otherwise can actually address inflation without depriving productive businesses of credit required for investment and employment.
There is a danger that fiscal pressures could work against the central bank's tight monetary stance. If revenue earnings fall short and the government relies on bank borrowing or creation of high-powered money to finance deficits, the tight stance would be defeated. Excess money chasing limited goods would further erode households' purchasing power, weaken the taka and fuel another round of inflation. At the same time, excessive public-sector borrowing could crowd out private businesses already suffering from anaemic credit growth. Notably, reserve-money growth has risen sharply in recent months, while the central bank has been providing liquidity support to stressed banks and undertaking refinance operations. In such a situation, monetary and fiscal policies cannot afford to move in opposite directions. The government will have to exercise fiscal discipline, improve revenue mobilisation and avoid treating the central bank as an easy source of financing. Otherwise, continuation of the tight monetary stance would amount to pressing the brake and accelerator simultaneously.
But the gravest obstruction to effective monetary policy lies in the impaired banking system itself. Non-performing loans reached 32.78 per cent of total bank loans, reportedly the highest ratio in the world. With nearly one taka in every three lent by banks classified as non-performing, capital eroded in many institutions and liquidity unevenly distributed, how can monetary policy work normally? The MPS acknowledges banking-sector stress, but appears to treat it as one among several problems rather than the central weakness limiting monetary policy. In truth, adjusting the price of money cannot produce desired outcome when the machinery distributing that money is itself dysfunctional. So, alongside quarterly monetary reviews, the BB needs to accelerate recovery of bad loans, restructure weak banks, enforce stricter supervision, curb lending under political influence and restore depositor and investor confidence. Quarterly reviews are welcome, but institutional frequency cannot substitute institutional effectiveness. Banking reform has to be at the heart of making monetary policy work.
In an economy exposed to fast-changing global energy prices, exchange-rate pressures, inflation and uncertain growth, waiting six months to reassess monetary conditions could prove too long. So, the Bangladesh Bank (BB)'s new three-month review cycle should enable the central bank to respond quickly to emerging risks. Against this backdrop, its maiden quarterly Monetary Policy Statement (MPS) for October-December 2026 is a continuation of the contractionary monetary regime by retaining the policy rate at 9.50 per cent. The decision is understandable. Headline inflation, though easing to 8.26 per cent in August, is still high, while non-food inflation remained at 9.32 per cent. Worse still, the recent fuel-price hike and the new national pay scale threaten to add fuel to cost-push inflation. Evidently, the BB is walking a tightrope between combating stubborn inflation and preventing economic activity from slowing further.
But the question is whether reviewing the monetary stance more frequently would help the policy achieve its objectives. The central bank reduced the repo rate from 10 per cent to 9.50 per cent in July to support investment and private credit. Yet private-sector credit growth stood at 4.75 per cent in August, remaining below 5.0 per cent for six months and far short of BB's 6.80 per cent target for December. This suggests that changes in the policy rate transmit quickly to market lending rates, but do not necessarily translate into stronger credit demand and contribute to investment or production. High borrowing costs are one part of the problem. Energy shortage, weak business confidence, depressed demand and banks' reluctance to lend to risky borrowers are equally important. So, the central bank's cautious stance is defensible, but caution alone cannot revive the real economy. More important than frequent policy changes in monetary policy or otherwise can actually address inflation without depriving productive businesses of credit required for investment and employment.
There is a danger that fiscal pressures could work against the central bank's tight monetary stance. If revenue earnings fall short and the government relies on bank borrowing or creation of high-powered money to finance deficits, the tight stance would be defeated. Excess money chasing limited goods would further erode households' purchasing power, weaken the taka and fuel another round of inflation. At the same time, excessive public-sector borrowing could crowd out private businesses already suffering from anaemic credit growth. Notably, reserve-money growth has risen sharply in recent months, while the central bank has been providing liquidity support to stressed banks and undertaking refinance operations. In such a situation, monetary and fiscal policies cannot afford to move in opposite directions. The government will have to exercise fiscal discipline, improve revenue mobilisation and avoid treating the central bank as an easy source of financing. Otherwise, continuation of the tight monetary stance would amount to pressing the brake and accelerator simultaneously.
But the gravest obstruction to effective monetary policy lies in the impaired banking system itself. Non-performing loans reached 32.78 per cent of total bank loans, reportedly the highest ratio in the world. With nearly one taka in every three lent by banks classified as non-performing, capital eroded in many institutions and liquidity unevenly distributed, how can monetary policy work normally? The MPS acknowledges banking-sector stress, but appears to treat it as one among several problems rather than the central weakness limiting monetary policy. In truth, adjusting the price of money cannot produce desired outcome when the machinery distributing that money is itself dysfunctional. So, alongside quarterly monetary reviews, the BB needs to accelerate recovery of bad loans, restructure weak banks, enforce stricter supervision, curb lending under political influence and restore depositor and investor confidence. Quarterly reviews are welcome, but institutional frequency cannot substitute institutional effectiveness. Banking reform has to be at the heart of making monetary policy work.
