In the new monetary policy for the current fiscal year, Bangladesh Bank will squeeze the growth of credit to the private sector in an effort to contain inflation.
For the current fiscal year, the central bank may set a target for the private sector credit growth at 18.2 percent. Until May last year, the growth rate was 22.28 percent.
The focus of the new monetary policy to be announced today is higher growth but lower inflation, a BB official said.
The government set the GDP growth target for this fiscal year at 6.7 percent and inflation at 6.5 percent.
Last fiscal year, the private sector credit growth target was 18 percent but it has already crossed the target, a central bank official said.
The official said the new credit growth target should be enough to achieve the economic growth target and increase investment. However, he said credit growth in the productive sector would not be hampered.
In the new monetary policy, BB is expected to encourage banks to slash credit to the non-productive sector. BB took a number of steps to cut credit to non-productive sectors.
Citing a central bank study, the official said there is a direct link between an increase of credit to the non-productive sector and a rise in inflation.
The BB Policy Analysis Unit analysed the increase in broad money supply and inflation from 2005 to 2009 and said if the supply of broad money goes up by 10 percent, inflation rises by 2.1 percent.
Of the broad money, 74 percent is private-sector loan, it said.
The study report was presented to the BB board last month. If the loan to the productive sector increases, GDP growth goes up and it helps contain inflation at the same time, the report said.
According to BB statistics, in fiscal 2009, credit growth to the construction sector rose by 24 percent and consumer loans went up by 31 percent.
From last July, the inflation rate increased every month. It started showing a slight downward trend since March, but the BB official said the trend may continue till June, and it will start going up from this month.
The BB official said the commercial banks have been directed to stop giving loans for land purchase, and the refinance scheme for the housing sector has been suspended, to cut the credit flow to the unproductive sectors.
The cash reserve requirement has also been increased from 5 percent to 5.5 percent.
As a result, a positive impact was seen in the credit flow. Consumer loan increased only 7.25 percent in March, compared to March 2009.
The BB official said the downward trend in loans to the non-productive sectors continued in the current fiscal year and the BB will monitor it continuously.
However, the government needs to take supply-side action to contain inflation so the supply of essential commodities, including rice, remains steady. The government will also have to take steps to check the hoarding of rice, he said.
The official said Trading Corporation of Bangladesh will have to import essential commodities and supply those to the market.
Source: thedailystar.net
