Central Bank Adopts New Monetary Policy Framework

Economic Tag: Central Bank

The Bangladesh Bank is set to introduce a new monetary policy framework aimed at enhancing its ability to manage inflation effectively. The upcoming fiscal year 2023-24 will witness significant changes in lending rates, policy rates, reserve calculations, and exchange rate mechanisms as part of this new approach. The International Monetary Fund (IMF) recommended the adoption of a flexible interest rate-targeting-based monetary policy to replace the existing money supply targeting framework.

The current monetary targeting model, focused solely on money supply targets, has proven inadequate in controlling inflation caused by external factors. The IMF proposed this shift during discussions for a prospective $4.5 billion loan. Bangladesh Bank’s efforts to manage inflation within 7.5% for the current fiscal year have been challenged by rising fuel prices globally and multiple price adjustments locally, leading to a decade-high inflation rate of 9.94% in May.

Under the new monetary policy, the lending rate cap will be removed, and a new lending rate formula based on a reference rate plus a risk premium will be introduced. A revised formula for setting the policy rate, known as the repo rate, will also be implemented. Additionally, an interest rate corridor with defined maximum and minimum rates will be established. The new policy will also align foreign exchange reserves reporting with the IMF’s recommendations.

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