Bangladesh Bank (BB) moved to contain inflation yesterday, increasing by one percentage point repurchase agreements (repo) and reverse-repo rates.
The repo rate is the interest rate on commercial banks' borrowing from the central bank; the reverse repo is the rate paid to the commercial banks that deposit money with the BB.
The central bank increased the repo and reverse repo to 5.5 percent and 3.5 percent, respectively.
The move means the banks will pay more when borrowing from the central bank, and so may do so less. The banks may soon deposit more money with the BB, given the higher interest earned. It should decrease the amount of money, including credit, now circulating.
"The central bank took the step as part of management of excess liquidity in banks," said an anonymity-seeking high official of the BB. He also said it will help manage the inflation.
K Mahmood Sattar, president of the Association of Bankers Bangladesh (ABB), said: "The economic signal of the central bank step is that money is getting dearer, but it will not increase the lending rate, as it has been capped at 13 percent."
In May, the central bank increased the cash reserve requirement of national banks by half percentage point, also to contain inflation. That same month it increased the cash-reserve ratio (CRR) by half a percentage point, to 5.5 percent.
In October of 2009, BB cut both repo and reverse-repo rates by four percentage points to curb inflation.
BB officials said the amount of excess liquidity in the banks was about Tk 35,000 crore on June 30.
In the last fiscal year, private sector credit increased by more than 24 percent, which is a jump of nearly 15 percent from the previous fiscal year.
The BB high official said high credit growth is creating inflationary pressure. BB found that if the private sector increases loans by 10 percent, inflation goes up by 2.4 percent.
In July, the biannual Monetary Policy Statement of the central bank emphasised containing inflation: "BB's monetary policy will continue pursuing the dual objectives of maintaining price stability and supporting faster economic growth."
The statement said liquidity levels in the market would be actively managed to limit demand-side pressure; and field-level surveys will gauge leakages of bank credit from declared purposes (including agricultural and SME loans) into other uses (personal consumption or market speculation).
In addition to repo and reverse-repo rates, cash reserves and liquidity requirements can be adjusted to rein in unwanted growth in the “broad money” and domestic credit portions of the money supply.
Mahmood Sattar, also managing director of City Bank, said it is not a pure contraction policy even though the deposit rate increased, because the lending rate was capped. As a result, the spread decreased. (The spread is the margin between lending and deposit rates.)
Sattar said the lending-rate moves would not continue. The rising rate of repo and reverse-repo will reduce loans in “unnecessary sectors” (land speculation, buying stocks on margin), but its effect will also fall on other sectors.
"By 'unnecessary sector' we understand the land and share markets,” he said. “BB, by issuing a circular, prohibited us from giving loans for purchasing land, so we are not giving loans for this purpose. BB has also imposed various restrictions on providing loans for investment in the share market."
Source: thedailystar.net
