Policy rate will be hiked twice within next month to tame inflation

The Bangladesh Bank (BB) will hike the repurchase (repo) rate twice in about a month and also raise the interest rate soon in a bid to tame inflationary pressures, said BB Governor Ahsan H Mansur at a press conference held at BB headquarters in the capital on Monday.

The first repo rate hike would come this week, he added.

While briefing the media following a meeting of the taskforce formed as part of reforms in the banking sector, the governor said, "A contractionary monetary policy will be followed as long as inflation is not under control. The policy rate will be hiked once next week and again next month."

On 25 August, the central bank raised the policy rate, also known as the repo rate, by 50 basis points to 9% in a bid to combat inflation. Since May 2022, the central bank has pursued a contractionary monetary policy, increasing the policy rate multiple times to manage inflation, leading to higher interest rates and increased borrowing costs.

Governor Mansur had previously announced that the policy rate would first rise to 9%, with a potential increase to 10% in phases. He added that while businesses stress the importance of reducing inflation, the current monetary policy is effective and will be tightened further. Inflation is projected to decrease to 5%-6% within the next seven to eight months.

The governor also indicated that interest rates will continue to rise until inflation shows signs of abating, with a stable currency exchange rate contributing to easing inflationary pressures.

Plans to merge smaller banks

Addressing the ongoing liquidity shortage in the banking sector, the governor said, "There are plans to merge some of the smaller banks facing liquidity issues, most of which are now owned by the government."

He further stated that an audit will focus on loans provided by these banks and identify the beneficiaries. "Initially, we will audit nine banks through a taskforce, with the first phase including Islami Bank. The audit will be conducted in three phases," he explained.

Commenting on the liquidity crisis, the governor added, "Banks experiencing liquidity issues now have a positive net deposit. As of yesterday (Sunday), these banks had a positive net deposit of Tk810 crore, indicating that deposit withdrawals are now less than incoming deposits."