Dr. Atiur Rahman, Governor, Bangladesh Bank :
It is now customary for Bangladesh Bank to announce ex-ante the monetary stance it will pursue for containing and stabilizing CPI inflation at desired moderate levels; to anchor inflation expectations among the general population. As in earlier cases, the MPS for H2 FY2015 has been drafted after eliciting views and suggestions of expert economists, business entrepreneurs and other stakeholder groups, both online and in pre-consultation sessions.
A general overview of the unfolding trends in the economic scene and the outcomes of the H1 FY2015 monetary stance will be in order before outlining the stance for H2 FY2015. Bangladesh Bank has got the country’s financial sector engaged in promotion of inclusive, environmentally sustainable financing of output activities, within the monetary growth envelop of cautious, restrained monetary programs consistent with price and macroeconomic stability. This has helped Bangladesh economy to maintain six plus percent annual average real GDP growth for well over a decade now amid prolonged global growth slowdown. Growth has averaged 6.2 percent over the last couple of years. Single digit CPI inflation has stabilized in a steadily downward edging trend. Declining lending interest rates coupled with rising foreign exchange reserves and Taka exchange rate stability is enhancing the investor friendliness of the domestic economic scene.
Progress in bringing annual average CPI inflation down from 7.35 percent at the beginning of FY2015 to 6.5 percent by June 2015 is broadly satisfactory, with 6.99 percent level by close of H1 FY2015. The CPI inflation decline is however mainly from the food component of the consumption basket; core (non-food, non-fuel) CPI inflation has been on somewhat upward edging trend in November and December 2014. Rise in government’s non-bank financing and subsidy cost savings from declining petroleum prices have kept government’s bank borrowing substantially below earlier projections. Credit growth to private sector though still somewhat below levels projected earlier, has however picked up substantially by Q2 FY2015 and remains upward edging.
Imports have recovered from growth sluggishness of the past couple of years; BOP current account balance has turned around from surplus to deficit, from pick up in imports mainly of capital machinery and production inputs. The welcome trend of recovery in momentum of investment and output activities in H1 FY2015 strengthened optimism of FY15 GDP growth significantly exceeding the earlier projections (6.5 – 6.8 percent) based on time series trend analyses. Unfortunately, disruptions from political unrest have reemerged, casting shadow on such expectations. Even as Bangladesh economy’s resilience against debacles is well known, overcoming from the now prevailing disruptive situation is of extreme urgency for protecting the momentum of growth and poverty decline. I earnestly hope that peace and calm will return soon, enabling realization of the growth prospects projected earlier.
Given that annual average CPI inflation is still above the targeted ceiling, that core inflation remains upward edging, and the looming uncertainties from the political unrest; the cautiously restrained monetary policy stance of H1 FY2015 will be continued unchanged in H2 FY2015, without any new loosening or tightening. H2 FY2015 monetary program drawn up on this basis will seek to limit FY2015 broad money (M2) growth at 16.5 percent, using controls on Bangladesh Bank’s reserve money growth as the main tool. Private sector credit will have space for 15.5 percent growth, a level substantially higher than the 12.7 percent November 2014 level. Besides access to external term financing and input import financing will remain open for industrial manufacturers. It may be noted that the programmed broad money and domestic credit growth levels have ample room of supporting output activities leading to higher GDP growth if the enabling environment turns out to be better than expected.
Besides maintaining continuity in monetary policy stance, Bangladesh Bank will also maintain continuity and further strengthen the momentum of investment friendly reforms in the credit and financial policies accompanying the monetary policies in H2 FY2015; towards enhancing effectiveness of the financial markets as transmission channels for monetary policies. Bangladesh Bank’s supervisory oversight on credit disbursement and loan recovery disciplines in banks and financial institutions will intensify; with particular emphasis on risk management, internal audit and internal controls, accountability and transparency. Besides firmly discouraging the abetting of habitual, willful repayment default; creating room for helping out recovery of genuine businesses distressed by circumstances beyond their control with realistic debt restructuring in line with international best practices has been approved by the Board of Directors of Bangladesh Bank a few days ago.
Deposit and lending interest rates of banks and financial institutions have been coming down in line with decline in CPI inflation; intermediation spreads between weighted average deposit and lending interest rates of banks and financial institutions have come down to five percent or lower in the state owned banks and the majority of private sector banks. The spreads are higher in the foreign banks and in some private sector banks with high engagement in riskier small enterprise lending. Bangladesh Bank’s attention towards rationalization of these higher spreads will continue. Competitive lending interest setting behavior not having yet fostered well in the local financial market, Bangladesh Bank resorted to setting ceilings on lending interest rates in two priority areas, viz. pre-shipment export credit and agricultural credit. In the context of general declining trend in interest rates, in H1 FY2015 Bangladesh Bank has revised the lending rate ceiling for agriculture downward from 13 to 11 percent. Competitive rate setting behavior in the market would have rendered prescription of such ceilings unnecessary. Bangladesh Bank will therefore pursue ways of fostering of competitive price setting, rate setting attitudes and practices in our financial markets.
Besides attention to financial markets stability, Bangladesh Bank’s attention in support of capital market stability will also continue in H2 FY2015. Bangladesh Bank has the statutory responsibility of enforcing compliance of banks with the legal limits on their capital market exposures; but further to this, Bangladesh Bank has continued liquidity support for capital market transactions in volumes permissible within Bangladesh Bank’s monetary programs. Bangladesh Bank played instrumental role in structuring the refinancing program supporting capital market activities; and will continue to play supportive role in capital market development to the feasible within laws and regulations. Also, Bangladesh Bank is engaging regularly with capital market and other financial system regulators in quarterly policy coordination meetings. Diverse fund flows in the financial markets act as transmission channels for monetary policy. Insufficient financial market development in Bangladesh significantly constrains the availability of adequate transmission channels. Absence of old age financial security nets in the form of pension and retirement savings schemes for the general population is one such serious inadequacy, not only for monetary policy transmission but also for access to long term savings options that fund infrastructure and other long term investments. Apart from pension and provident fund schemes for those employed in formal public and private sector organizations, long term old age pension and retirement savings schemes for the general adult population exist in developed and developing economies including neighboring India. Bangladesh Bank has drawn to government’s attention the urgency of setting up institutional framework for such schemes in Bangladesh; and the issue warrants priority attention from aspects of monetary policy efficacy, financial markets development, and long term investment needs in the real sector.
MPS for H1 FY2015 issued today will play the same effective role as the previous issues in instilling and strengthening public confidence on Bangladesh Bank’s actions aimed at containing and stabilizing CPI inflation; and its attendant inclusive, environmental sustainability supportive credit and financial policies will make meaningful contribution in supporting the governments pursuit of inclusive, environmentally sustainable growth and poverty eradication on the country’s path towards prosperity.
It is now customary for Bangladesh Bank to announce ex-ante the monetary stance it will pursue for containing and stabilizing CPI inflation at desired moderate levels; to anchor inflation expectations among the general population. As in earlier cases, the MPS for H2 FY2015 has been drafted after eliciting views and suggestions of expert economists, business entrepreneurs and other stakeholder groups, both online and in pre-consultation sessions.
A general overview of the unfolding trends in the economic scene and the outcomes of the H1 FY2015 monetary stance will be in order before outlining the stance for H2 FY2015. Bangladesh Bank has got the country’s financial sector engaged in promotion of inclusive, environmentally sustainable financing of output activities, within the monetary growth envelop of cautious, restrained monetary programs consistent with price and macroeconomic stability. This has helped Bangladesh economy to maintain six plus percent annual average real GDP growth for well over a decade now amid prolonged global growth slowdown. Growth has averaged 6.2 percent over the last couple of years. Single digit CPI inflation has stabilized in a steadily downward edging trend. Declining lending interest rates coupled with rising foreign exchange reserves and Taka exchange rate stability is enhancing the investor friendliness of the domestic economic scene.
Progress in bringing annual average CPI inflation down from 7.35 percent at the beginning of FY2015 to 6.5 percent by June 2015 is broadly satisfactory, with 6.99 percent level by close of H1 FY2015. The CPI inflation decline is however mainly from the food component of the consumption basket; core (non-food, non-fuel) CPI inflation has been on somewhat upward edging trend in November and December 2014. Rise in government’s non-bank financing and subsidy cost savings from declining petroleum prices have kept government’s bank borrowing substantially below earlier projections. Credit growth to private sector though still somewhat below levels projected earlier, has however picked up substantially by Q2 FY2015 and remains upward edging.
Imports have recovered from growth sluggishness of the past couple of years; BOP current account balance has turned around from surplus to deficit, from pick up in imports mainly of capital machinery and production inputs. The welcome trend of recovery in momentum of investment and output activities in H1 FY2015 strengthened optimism of FY15 GDP growth significantly exceeding the earlier projections (6.5 – 6.8 percent) based on time series trend analyses. Unfortunately, disruptions from political unrest have reemerged, casting shadow on such expectations. Even as Bangladesh economy’s resilience against debacles is well known, overcoming from the now prevailing disruptive situation is of extreme urgency for protecting the momentum of growth and poverty decline. I earnestly hope that peace and calm will return soon, enabling realization of the growth prospects projected earlier.
Given that annual average CPI inflation is still above the targeted ceiling, that core inflation remains upward edging, and the looming uncertainties from the political unrest; the cautiously restrained monetary policy stance of H1 FY2015 will be continued unchanged in H2 FY2015, without any new loosening or tightening. H2 FY2015 monetary program drawn up on this basis will seek to limit FY2015 broad money (M2) growth at 16.5 percent, using controls on Bangladesh Bank’s reserve money growth as the main tool. Private sector credit will have space for 15.5 percent growth, a level substantially higher than the 12.7 percent November 2014 level. Besides access to external term financing and input import financing will remain open for industrial manufacturers. It may be noted that the programmed broad money and domestic credit growth levels have ample room of supporting output activities leading to higher GDP growth if the enabling environment turns out to be better than expected.
Besides maintaining continuity in monetary policy stance, Bangladesh Bank will also maintain continuity and further strengthen the momentum of investment friendly reforms in the credit and financial policies accompanying the monetary policies in H2 FY2015; towards enhancing effectiveness of the financial markets as transmission channels for monetary policies. Bangladesh Bank’s supervisory oversight on credit disbursement and loan recovery disciplines in banks and financial institutions will intensify; with particular emphasis on risk management, internal audit and internal controls, accountability and transparency. Besides firmly discouraging the abetting of habitual, willful repayment default; creating room for helping out recovery of genuine businesses distressed by circumstances beyond their control with realistic debt restructuring in line with international best practices has been approved by the Board of Directors of Bangladesh Bank a few days ago.
Deposit and lending interest rates of banks and financial institutions have been coming down in line with decline in CPI inflation; intermediation spreads between weighted average deposit and lending interest rates of banks and financial institutions have come down to five percent or lower in the state owned banks and the majority of private sector banks. The spreads are higher in the foreign banks and in some private sector banks with high engagement in riskier small enterprise lending. Bangladesh Bank’s attention towards rationalization of these higher spreads will continue. Competitive lending interest setting behavior not having yet fostered well in the local financial market, Bangladesh Bank resorted to setting ceilings on lending interest rates in two priority areas, viz. pre-shipment export credit and agricultural credit. In the context of general declining trend in interest rates, in H1 FY2015 Bangladesh Bank has revised the lending rate ceiling for agriculture downward from 13 to 11 percent. Competitive rate setting behavior in the market would have rendered prescription of such ceilings unnecessary. Bangladesh Bank will therefore pursue ways of fostering of competitive price setting, rate setting attitudes and practices in our financial markets.
Besides attention to financial markets stability, Bangladesh Bank’s attention in support of capital market stability will also continue in H2 FY2015. Bangladesh Bank has the statutory responsibility of enforcing compliance of banks with the legal limits on their capital market exposures; but further to this, Bangladesh Bank has continued liquidity support for capital market transactions in volumes permissible within Bangladesh Bank’s monetary programs. Bangladesh Bank played instrumental role in structuring the refinancing program supporting capital market activities; and will continue to play supportive role in capital market development to the feasible within laws and regulations. Also, Bangladesh Bank is engaging regularly with capital market and other financial system regulators in quarterly policy coordination meetings. Diverse fund flows in the financial markets act as transmission channels for monetary policy. Insufficient financial market development in Bangladesh significantly constrains the availability of adequate transmission channels. Absence of old age financial security nets in the form of pension and retirement savings schemes for the general population is one such serious inadequacy, not only for monetary policy transmission but also for access to long term savings options that fund infrastructure and other long term investments. Apart from pension and provident fund schemes for those employed in formal public and private sector organizations, long term old age pension and retirement savings schemes for the general adult population exist in developed and developing economies including neighboring India. Bangladesh Bank has drawn to government’s attention the urgency of setting up institutional framework for such schemes in Bangladesh; and the issue warrants priority attention from aspects of monetary policy efficacy, financial markets development, and long term investment needs in the real sector.
MPS for H1 FY2015 issued today will play the same effective role as the previous issues in instilling and strengthening public confidence on Bangladesh Bank’s actions aimed at containing and stabilizing CPI inflation; and its attendant inclusive, environmental sustainability supportive credit and financial policies will make meaningful contribution in supporting the governments pursuit of inclusive, environmentally sustainable growth and poverty eradication on the country’s path towards prosperity.
