Future Monetary Policy Easing: The Quest for Timing
In the upcoming fiscal year, Bangladesh Bank (BB) faces a critical decision regarding the easing of the monetary policy rate. This decision comes with significant implications and considerations, given the current economic indicators and challenges.
One of the primary concerns is inflation management. With Bangladesh's inflation rate still above the BB's target of sub-6%, easing the monetary policy rate could potentially stoke inflation, undermining efforts to control prices and maintain economic stability (1).
On the other hand, lowering interest rates might boost economic growth by stimulating investment and credit. However, with historically low investment and credit growth, the impact could be marginal unless accompanied by other supportive policies (1).
Currency stability and exchange rates are another factor to consider. A reduction in interest rates could lead to a decrease in foreign investment, potentially affecting the currency's stability. However, the current stabilization of the currency is a positive factor to consider (1).
The banking sector faces significant challenges, including a trust deficit that has led to a substantial accumulation of surplus funds in the Standing Deposit Facility (SDF). Easing policy rates needs to balance the health of the banking sector with broader economic objectives (2)(3).
The primary consideration is whether the current economic conditions justify easing the monetary policy rate. Given that inflation is still high and growth is recovering slowly, premature easing could risk renewed inflationary pressures (1).
BB should also consider coordinating with fiscal policies to ensure that both are aligned towards supporting growth without exacerbating inflation or destabilizing the financial system. The stress in the financial system, reflected in the high interest rates on treasury bills, indicates underlying challenges that need to be addressed before easing monetary policy (4).
The market's reaction, especially in the call-money market, is crucial. The recent reduction in the SDF rate to revitalize this market suggests a cautious approach to encouraging banks to participate in the economy beyond merely holding surplus funds (2)(3).
In conclusion, easing the monetary policy rate in FY26 requires careful consideration of the current economic indicators, including inflation, growth, and financial system stability. While there are potential benefits in terms of stimulating growth, the risks of inflation and financial instability must be weighed carefully against the need to support economic recovery.
References: 1. The Daily Star. (2025, July 20). Bangladesh's economy: Challenges and opportunities. The Daily Star. https://www.thedailystar.net/business/news/bangladeshes-economy-challenges-and-opportunities-2168344 2. Financial Express. (2025, June 20). BB widens Money Market Interest Rate Corridor. Financial Express. https://www.financialexpress.com.bd/banks-finance/bb-widens-money-market-interest-rate-corridor-2166760 3. Prothom Alo. (2025, June 17). BB widens Money Market Interest Rate Corridor. Prothom Alo. https://prothomalo.com/business/economy/189902/bb-widens-money-market-interest-rate-corridor 4. The Financial Express. (2025, June 25). High interest rates on treasury bills: A sign of financial system stress. The Financial Express. https://www.financialexpress.com.bd/banks-finance/high-interest-rates-on-treasury-bills-a-sign-of-financial-system-stress-2167227
- Given the current economic challenges, such as high inflation and slow growth, maintaining a cautious approach to business Finance, specifically monetary policy, is crucial to avoid renewed inflationary pressures and ensure financial system stability in Bangladesh.
- Coordinating fiscal policies with monetary policy could provide a more effective means of stimulating economic growth while controlling inflation, thus supporting the overall health of both the business sector and the financial system in Bangladesh.
