Bangladesh central bank raises key policy rate to 10% to combat soaring inflation

In an effort to combat persistent inflation, Bangladesh Bank has raised the repo interest rate by 50 basis points, setting it at 10%.

Effective from 27 October, this move marks the third hike in two months as the central bank aims to curb high price levels.

The adjustment follows earlier increases in September and August, underscoring Bangladesh Bank's strategy to contract the money supply and bring inflation closer to target levels.

As the nation grapples with economic pressures, the hike is expected to impact borrowing costs for commercial banks.

Why did the Bangladesh Bank raise the repo rate again?

The decision to raise the repo rate, also known as the key policy rate, comes amid Bangladesh's ongoing battle with high inflation.

The central bank's move to increase the rate by 50 basis points follows previous hikes in September and August.

The objective is to tighten the money supply, reducing liquidity in the banking system.

With the rate now at 10%, Bangladesh Bank aims to bring inflation under control, though this strategy may result in increased borrowing costs for banks experiencing liquidity shortfalls.

Alongside the repo rate increase, Bangladesh Bank has adjusted the Standing Lending Facility (SLF) to 11.50% and the Standing Deposit Facility (SDF) to 8.50%.

These changes in the policy interest corridor are designed to regulate the flow of money within the economy, influencing both the cost of borrowing for commercial banks and the returns on deposits.

The tightened monetary stance is part of a broader strategy to rein in inflation, which remains a significant challenge for Bangladesh's economy.

Despite efforts to cool inflation, the latest data from the Bangladesh Bureau of Statistics (BBS) shows that the general inflation rate was 9.63% in September, a rise from 9.10% in the same period last year.

While there has been some easing since the peak in July, food inflation continues to be a concern, hovering above 12%.

High food prices have disproportionately impacted low-income households, leading to social unrest and protests earlier in the year.

The central bank's rate hike is seen as a measure to stabilize these economic conditions.

Will the inflation rate ease by early 2025?

Bangladesh Bank Governor Ahsan H Mansur has expressed hope that inflation might ease by March or April next year.

He acknowledges that the path to stabilizing price levels will not be swift.

The central bank's commitment to maintaining a tight monetary policy is expected to support efforts to stabilize the economy and address inflationary pressures.

Governor Mansur has also pointed to increasing remittances and a stabilized exchange rate as positive signs that could aid in reducing inflation in the coming months.

The latest repo rate hike is part of a series of measures aimed at addressing Bangladesh's economic challenges.

Governor Mansur, who took charge earlier this year, has prioritized controlling inflation through a contractionary monetary policy.

This approach is intended to bring down the soaring prices that have strained households across the country.

The policy’s success will depend on how effectively the central bank can balance economic growth with the need for price stability.

As inflation remains elevated, the next few months will be critical in determining the outcome of Bangladesh’s monetary strategy.