Bangladesh Bank has decided to mop up excess liquidity in the banking system as it is hurting banks, savers and small borrowers and also threatening to create instability in the economy through asset bubbles, reports a national daily. Under this intervention policy, the central bank will auction BB Bill to banks against 7-day, 14-day and 30-day maturity periods. The central bank will also use reverse repo which means buying excess cash from banks against treasury bills and also raising the advance deposit ratio of banks to strip those of excess funds. A BB official has said that the central bank has taken the initiative as part of its latest monetary policy stance, which indicated withdrawing surplus funds in phases.
The central bank unveiled an ‘expansionary and accommodative’ monetary policy on July 29, aiming to keep funds available for the productive sector and curb its flow to the unproductive sectors. These are the steps that the central bank may make use of to tame excess liquidity in the banks to put a brake on asset bubbles, such as huge investment in stocks to make quick gains while it poses huge risk at the end. Easy money at lower deposits and lending rates is already causing instability in the money market, because most savers now don’t want to put money in banks at a very small rate of return on savings.
We would say this is definitely a right step that the market urgently needs to mop up idle liquidity in the banking system. We hope this should help withdraw up to Tk 30.000 crore from the banks as per expert opinion when the banking sector is sitting over Tk 2.31 trillion excess liquidity. It will help to stabilise the market. In fact the entire mismatch has been exacerbated from last year with the spread of Covid-19 to push private sector credit demand to quite low at around 8.40 per cent from over 14 per cent. The situation may not improve this year as well as per recent forecast of Bangladesh Bank monetary policy outlines.
Withdrawal of excess liquidity also aims at containing inflation which had crossed target in the last fiscal. We appreciate the central bank’ cautious monetary policy outlook to make easy credit available for expansion of business that would help economic recovery and create jobs, not for investment in speculative business. The country has suffered enough from ineffective monetary policy in the past.
