It is the first rate cut by the Bangladesh Bank (BB) since a similar-size rate cut in February 2013. The repo rate cut is being cut to 6.75 percent and the reverse repo rate to 4.75 percent.
"Based on commendable macro stability, it is high time to stimulate investment and thus growth where political calm beckons to use improved condition in market confidence," the bank said in its monetary policy statement for January-June 2016.
Bangladesh's inflation rate rose slightly to 6.1 percent in December from 6.05 percent in November, but down from a 2015 high of 6.36 percent in July and highs close to 12 percent at the end of 2011.
The central bank forecast inflation of 6.07 percent in June 2016 as some effects of pay rises in the government sector are likely to be canceled out by the dampening fuel and commodity prices.
In its previous policy statement from July, the BB targeted average inflation of 6.2 percent for fiscal 2015/16.
Domestic credit is projected to grow at 15. recent at the end of fiscal 2016 from 10.9 percent in December 2015, with the central bank saying it aims to stimulate investment, with a focus on expanding quality credit through an inclusivity approach.
BB also said it had made a strategic shift in loan disbursement policy and all banks will be encouraged to substantially increase advances for micro, small and medium enterprises.
Bangladesh Bank issued the following speech by its governor, Atiur Rahman:
"A very good morning to our friends from the media and colleagues from the Bangladesh Bank. It is wonderful to be here with you all as we announce the monetary policy statement for the second half of FY2016. Faithful to our consultative tradition, we have discussed with a large number of stakeholders to get the latest pulse of the economy and incorporated their views on the economic constraints and outlook in designing our forward looking monetary policy stance.
Let me first recap the recent economic developments, which embed the impact from the past monetary stance.
In 2015, the economy and the financial system made good progress. Despite some initial challenges, we achieved a respectable growth of 6.5 percent, and macro-financial and price stability, reaching the milestone of a lower-middle income country status. Since the last MPS, prices have remained broadly stable, with overall inflation moderating from 6.4 in June to 6.2 percent in December and currently within the target. That said, core inflation - without food and fuel - at 6.8 percent in December reflects some price pressure and, therefore, suggests a need for caution.
Recent economic indicators point toward a solid growth momentum in FY2016: export is picking up despite challenging external environment; capital machinery import grew robustly in recent months; private sector credit growth rose to 13.7 percent in November, up from 13.2 percent during the last MPS in June, supplemented by strong private sector external borrowing. Interest rates have declined, with spreads now at less than 5 percent. Banks are being encouraged to further bring down the spreads. Incorporating both the domestic and external developments, Bangladesh Bank projects FY2016 growth at 6.8-6.9 percent and inflation at 6.1 percent in June 2016. With continued political stability, growth could reach 7 percent.
Balancing the latest output and price considerations, we maintain a cautious but supportive monetary stance: First, we lowered the policy rates - repo and reverse repo - by 50 basis points to 6.75 and 4.75 respectively to realign policy rates with the market rates. Second, broad money and private sector credit growth are projected at 15 and 14.8 percent, respectively, slightly lower than the last MPS target but higher than the actual outcome. This policy recalibration - lower policy rate and prudent credit and broad money targets - can sufficiently accommodate growth without sacrificing the inflation performance. As always, we remain vigilant and ready to adjust our stance as facts on the ground and the outlook on the horizon evolve.
Let me share with you some strategic considerations for our economy at this lower-middle income phase and how we are trying to nudge the financial system to rise address those challenges.
First, the external environment. Looking ahead, the global outlook remains challenging: Although the U.S. economy has shown solid growth, Europe remains weak and Japan's expected recovery has not materialized. China's growth is softening as it transitions from investment and manufacturing to consumption and services. With some exceptions such as India, emerging and developing countries continued to slow.
Global potential growth has slowed. Global growth performance will be slower than in the past.
What does it mean for our macro- strategy and growth aspirations? The short answer is: For the same level of growth, we will need to row harder. We therefore need to upgrade our export performance through higher productivity, investment, and diversification. But that may not be enough. We can and should add another strong engine to our export-led growth model. That engine is our domestic demand, which, fortunately, can leverage our demographics, tech-savvy youth, market size, and population density. Our growth will then be even more robust, fuelled by two engines - export and domestic demand. To avoid any confusion, let me stress: it is not either or; it is and.
For these two engines, especially the domestic demand, to function properly, financial system has to play a critical role: ensuring that national savings rise and are then channelled to their most productive and equitable usages, not to the privileged bidders. It is not only higher but also more productive investment that we are after. This will also require further deepening our financial system.
Bangladesh Bank remains committed to serving the savers and the borrowers through better, regulation, supervision, policy innovation, and market development.
Bangladesh Bank places strong emphasis on improving governance and supervision to achieve higher financial intermediation efficiency. The recent BB appointments of bank observers reflects that priority.
In terms of market development, BB is working on making the bond market more accessible to both domestic, foreign, and NRB investors, more liquid by upgrading market infrastructure and diversifying the domestic investor base. In this context, developing pension fund and insurance industry will be important for mobilizing longer-term fund. The upcoming issuance of IFC's Taka bond will provide more resources for investment and provide a currency risk benchmark which will aid pricing of local currency bonds by the foreign investor. Our prudent monetary policy and regulatory support are designed to foster a sustainable development of capital markets. We are also working on issuing green bond to nudge our financial system to serve our environment.
working on issuing green bond to nudge our financial system to serve our environment.
Our financial inclusion initiatives are also maturing as the dividends of earlier years accrue and we widen and deepen these initiatives based on the results and evolving needs. Bangladesh Bank will provide a US $200 million "Green Transformation Fund" to support green transitions in the export-oriented textiles and leather industries, supplemented by another $300 million from the World Bank. Our Export Development Fund has now reached US$2 billion. We continue to provide regulatory and supervisory support so that credit reaches the growth- and equity-rich sectors, like MSMEs and agriculture. Thus, we can magnify the growth and equity impact of credit through interventions in targeted, inclusive, and sustainable subsectors (e.g., agriculture, livestock, green products, apparel, leather etc.), while respecting the overall monetary targets. Going forward, the government's renewed focus on developing agriculture and crop insurance will fill an important segment of financial inclusion - i.e., insurance, which can unlock credit and reduce vulnerabilities.
As a developmental central bank, our view is that societies and pyramids are as strong as its base. Let's continue working on the base of the pyramid; let's make that pyramid strong by ensuring macro-financial and price stability. Let 2016 be the year of hope and confidence; the year of growth and investment."