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The new repo rate — the interest rate at which banks borrow short-term funds — from the central bank was implemented on Sunday.
With this, Bangladesh Bank changed its policy or repo rate for the third time in just four months.
The central bank said this was done to control inflation.
However, economists believe that this policy of increasing the repo rate without increasing the general lending rate will not have a practical impact on inflation like it did not have an effect that last two times.
In a surprise move, Bangladesh Bank raised its repo rate or repurchase agreement rate by 25 basis points to 5.75%.
The decision comes three months after the previous hike on June 30, when it raised the repo rate by 50 basis points to 5.50%.
Before that, it was raised by 25 basis points to 5.00% on May 29.
Regarding the new repo rate’s impact, a central bank official told Dhaka Tribune: “We want banks to borrow from one another at a rate lower than the repurchase agreement rate. After this new repo rate, I think banks will borrow fewer loans from Bangladesh Bank from Sunday.”
Zahid Hussain, lead economist consultant for World Bank said: “There is no indication of any policy adjustment other than the 25 basis point increase in the repo rate. The role of the bank lending rate in the transmission of monetary policy is in a deep freeze.”
“The 75 basis point increase in the policy rate so far has less than 200 basis point room to move the lending rates industry-wide. Meanwhile, the differential between the rates on safe assets and the lending rate cap has shrunk massively,” he added.
Asked about any possible impact on the call money rate on inflation because of the policy rate hike, Zahid Hussain said: “Usually, if the policy rate gets raised, so does the lending rate. The rise in lending rate leads to a fall in credit demand. Thus, demand for goods and services falls, causing reduced inflation. But, this theory will not be effective in our country because of the lending rate cap.”
But he also agrees that due to this decision, the call money rate — the interest rate at which banks borrow funds from one another — may increase the amount of lending and cost for the banks.
Interbank call money rate rises
Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately whenever the lender demands it.
According to Bangladesh Bank data, the average inter-bank repo rate or call money rate was 5%-8.5% on October 3.
Data analysis shows that the interbank’s highest interest rate hit 6.25% for short notice overnight (1 day) borrowing.
Short notice three days and seven days’ interest rate is 7.25% and 7.75%.
No inflation data published in two months
Generally, the inflation rate of the previous month is published in the first week or the beginning of the second week of the following month. But the inflation rate for August has not been published yet.
Although July data was published on August 3 when the inflation came down a bit.
After that, two months have passed and no data has been published. Insiders said that inflation crossed the 9% mark in August and the regulatory bodies may want to conceal it.
However, since January this year, the inflation graph has been rising sharply.
According to Bangladesh Bureau of Statistics (BBS) data, the general inflation rate was 7.48% in July and 7.56% in June.
From January to May this year, this rate was 5.86%, 6.17%, 6.22%, 6.29% and 7.42% respectively.
Repo rate and private sector credit growth
Policy rate is a monetary tool, which is used to dampen credit demand.
But the credit growth remained upward even after the policy rate was hiked on a previous couple of occasions owing to the lending rate cap.
Economists said that the policy rate became ineffective when the lending rate was fixed at 9% as banks could not make loans costlier for borrowers.
The Bangladesh Bank raised the policy rate from 4.75% to 5% in May when the private sector credit growth was nearly 13%. Later in the monetary policy for the current fiscal year, the central bank hiked the rate for the second time in June to 5.50% when credit growth was 13.66%.
Finally, the credit growth crossed 14.07% in August, very close to the monetary target of 14.1% set for the current fiscal year. It prompted the central bank to further raise the rate.
The Bangladesh Bank raised the policy rate at a time when global central banks are also tightening monetary policy to guard against inflation.
(DT)
