Bangladesh's central bank kept its policy rate steady at 7.75 percent and aims to bring inflation down to 7.0 percent "while ensuring that credit growth is sufficient to stimulate inclusive economic growth."
The Bangladesh Bank (BB) said in its monetary policy statement for the second half of the current 2014 fiscal year that it would use both monetary and financial sector policy instruments to reach its inflation goal and specifically contain reserve money growth to 16.2 percent and broad money growth to 17.0 percent by the end of June 2014.
"The persisting inflationary pressures over the past few months with the risks ahead related to the inflation outlook imply that achieving the FY14 target will be challenging," BB said.
In its previous policy statement from July 2013, the BB aimed to limit reserve money growth to 15.5 percent and broad money growth to 17.2 percent by December 2013. Bangladesh's financial year begins on July 1.
BB also said it expects a further build-up of foreign reserves in the current fiscal year though at a more moderate pace than last year when international reserves rose to US$18.1 billion by the end of December from $15.3 billion end of June 2013, sufficient for about 5-1/2 months of imports.
"BB will continue to support a market-based exchange rate while seeking to avoid excessive
foreign exchange rate volatility," the central bank said.
During the July-December period, the central bank intervened in the foreign exchange market by purchasing $2.35 billion of foreign currencies to protect the international competitiveness of Bangladesh. The surplus in the country's current account balance rose to $1.384 billion in the July-November period compared to a surplus of $433 million in the same period last year.
After rising in the last month of 2012 and through the first half of 2013, the taka has only risen slightly in the last seven months, trading at 77.30 to the US dollar today compared with 79.68 end-2012, a gain of almost 3 percent.
The central bank said inflation had continued to rise due to higher food prices, with the average rate rising to 7.53 percent in December from 6.06 percent in January 2013. Non-food inflation, however, has declined steadily from a peak of 11.28 percent in October 2012 to 4.88 percent in December due to slower economic activity and lower consumer demand. The central bank attributed the rise in food prices to higher distribution costs from frequent strikes and that Indian food inflation had also risen.
"Reducing average inflation from its current 7.5% level may prove challenging especially as aggregate demand is likely to pick up in FY14 and the recent rise in Indian inflation is also a risk for Bangladesh," the BB said.
The central bank expects slightly slower economic growth in fiscal 2014 from fiscal 2013's estimated 6.2 percent due to sluggish growth in the services and construction sector along with an 8.4 percent decline in remittances in the first half of the current fiscal year from the first half of fiscal 2013.
The central bank said it was currently forecasting that growth will be pick up in the second half of the current fiscal year with growth for fiscal 2014 now forecast at 5.8 percent to 6.1 percent, slightly up from its forecast of 5.7-6.1 percent in December 2013. If there are no major disruptions to the economy, output growth would be close to 6.0 percent, BB said.