After maintaining a tight monetary policy for 21 months to curb persistently high inflation, Bangladesh Bank has finally eased its stance by lowering the policy interest rate. The repo rate, or policy rate, has been reduced by 50 basis points from 10% to 9.5%, a move expected to gradually lower banks’ funding costs and, in turn, reduce lending rates.
Economists and business leaders believe lower borrowing costs could encourage investment and employment. However, concerns remain over whether the decision could reignite inflation, which has remained above 9% for three consecutive months.
The decision was taken at the 13th meeting of Bangladesh Bank’s Monetary Policy Committee (MPC) on Thursday, chaired by Governor Mostakur Rahman. The new policy rate will take effect from Sunday.
In a statement, the central bank said the decision was based on a comprehensive assessment of domestic and global inflation trends, private sector investment, credit growth, employment, economic expansion and the balance of payments.
Loan Interest Rates Expected to Decline
Economists say lower policy rates will reduce banks’ cost of borrowing from the central bank, allowing commercial banks to gradually cut lending rates. However, increased credit flow could also expand the money supply, potentially adding fresh inflationary pressure.
They caution that interest rates alone do not determine investment decisions. Political stability, tax policy, governance, corruption and global trade conditions also play critical roles.
The BNP-led government has placed investment and employment at the centre of its economic agenda. Its election manifesto targets transforming Bangladesh into a $1 trillion economy by 2034, with lower borrowing costs considered one of the measures to support investment.
Governor Mostakur Rahman had initially planned to reduce the policy rate soon after assuming office. However, the plan was delayed following the escalation of tensions involving Iran, the United States and Israel. Bangladesh Bank instead maintained a contractionary monetary policy in the first half of the current fiscal year.
The repo rate is the interest rate at which Bangladesh Bank lends short-term funds to scheduled banks and is one of the central bank’s primary tools for controlling inflation.
Mohammad Ali, Managing Director of Pubali Bank, said lending rates had already begun to ease and would fall further following the policy rate cut.
“The decision has been taken in the interest of the overall economy. Deposit rates will also decline. Depending on the bank, lending rates may fall by between 0.5 and 1 percentage point,” he said.
Will Investment Increase?
Bangladesh’s business sector has experienced sluggish investment for more than two years due to high borrowing costs, energy shortages, exchange rate volatility and political uncertainty.
Business leaders say the reduction in the policy rate sends a positive signal to investors, although borrowing costs are only one factor influencing investment decisions.
Entrepreneurs note that commercial lending rates have climbed to 14–15%, making it difficult to generate profits. They argue that reliable gas and electricity supplies, political stability, law and order, and an improved business environment are equally important.
Bangladesh Bank data show private sector credit growth slowed to just 4.98% in May, the lowest level in two decades.
BGMEA President Mahmud Hasan Khan said the benefits of the policy rate cut would become more evident over time.
“We hope the policy rate will be reduced further in phases. Alongside lower borrowing costs, improving the ease of doing business is essential for revitalising trade and investment. The finance and commerce ministers have already promised several business-friendly reforms, and we expect their swift implementation,” he said.
Inflation Remains a Concern
Following the fall of the Awami League government during the mass uprising on 5 August 2024, inflation stood at nearly 12%, while food inflation exceeded 14%.
The interim government adopted several measures, including a contractionary monetary policy, higher interest rates and tariff reductions on essential goods, helping inflation fall to around 8.5%.
However, inflation has climbed above 9% again for the past three months since the new government took office in February.
Economists attribute the renewed inflationary pressure partly to rising global fuel prices and supply disruptions caused by the Israel-Iran conflict. The government raised fuel prices twice in April and May, followed by an electricity tariff increase in late May.
According to a study by the Centre for Policy Dialogue (CPD), around 60% of households now spend half of their income on food, with low-income families bearing the heaviest burden.
CPD Distinguished Fellow Mustafizur Rahman said the policy rate cut itself is unlikely to accelerate inflation.
What Are the Risks?
Some economists warn that lower interest rates encourage borrowing and increase money circulation. If supply constraints remain unresolved, stronger demand could push inflation higher again.
Selim Raihan, Executive Director of SANEM, said the decision could create the impression that inflation is already under control, although the underlying structural problems persist.
“If food supply weaknesses, high import costs, exchange rate instability and market distortions continue, lower interest rates will simply stimulate demand. Without corresponding improvements in supply, inflationary pressures could intensify again,” he said.
Source : Prothom Alo
