The central bank of Bangladesh cut its two policy rates, the repo and reverse repo, to their current levels of 4.75 and 6.75 percent in January 2016.
In its monetary policy statement for the second half of 2016/17, which began in January, BB forecast broad money and private sector credit growth targets of 15.5 percent and 16.5 percent, respectively, by June 2017.
This is in line with private sector credit growth of 15-16 percent in first half of 2016/17, three-year high levels with strong demand from trade, construction and small and medium enterprises.
In calendar 2016 Gross Domestic Product in Bangladesh grew by an all-time high of 7.11 percent, up from 6.55 percent in 2015. BB has projected growth of 7.2 percent for 2016/17.
Consumer price inflation in Bangladesh decelerated to 5.03 percent in December from 5.38 percent in November, pulling down the annual average to 5.5 percent, just under the inflation ceiling of 5.8 percent.
But core inflation, which excludes food and fuel, remains elevated at around 7.6 percent in December, "indicating inflation can pick up if buffeted by adverse shocks," BB said.
"Looking ahead, the global commodity outlook suggests some upward price pressures may emerge from higher import prices," the central bank added.
In the June-November 2016 period, average lending and deposit rates declined by 45 and 25 basis points to 9.94 percent and 5.29 percent, respectively, reflecting favorable inflation, ample liquidity and an increase in competition in the banking system, BB said.
Bangladesh Bank issued the following highlights from its monetary policy statement:
. Broad money (M2) grew by 13.8 percent in November 2016, remaining within the FY17 ceiling of 15.5 percent to support the GDP growth target of 7.2 percent and the inflation ceiling of 5.8 percent, respectively. In the first half of this fiscal year, private sector credit growth exceeded 15 percent, a three-year high but within the FY17 ceiling of 16.5 percent.
Both food and non-food CPI inflation moderated, aided by favorable agricultural production,
modest rise in global commodity prices, and growth supportive yet cautious monetary policy stance.
Average CPI inflation declined to 5.5 percent by December 2016, a five-year low and well within the
FY17 ceiling. Bangladesh Bank (BB) projects annual average inflation to be around 5.3-5.6 percent
in FY17. Projected rise of global commodity prices in 2017, however, may continue exerting some
upward pressure on domestic prices.
Domestic demand-driven economic activity remains relatively buoyant, as indicated by credit
growth, industrial activity, and import trends. Despite some moderation, garment exports growth
has held up well relative to peers. The recent decline in remittance reflects a combination of global
and local factors, but mainly driven by weaker economic activity in the Middle East. Recovery in
remittance growth can be expected over the near to medium term from oil price stabilization
boosting Middle Eastern economies, as also from the recent upsurge in manpower exports from
Bangladesh. Based on the recent economic indicators and econometric analysis, BB projects GDP
growth to be above 7 percent in FY17.
Balancing the upside potential and the risks, BB maintains the current policy stance: repo and
reverse repo rates will remain unchanged at 4.75 and 6.75 percent, respectively, to support growth
while mitigating inflation risks. Broad money and private sector credit growth targets for FY17 are
15.5 and 16.5 percent, respectively.
Given the pickup in credit growth, BB’s supervisory vigilance on lending efficiency and risk
management in the financial sector will continue to be strengthened, with particular emphasis on
transparent, accountable corporate governance, and substantial reduction in loan defaults.
2011, caution is warranted in ensuring that exuberance remains rational. Bangladesh Securities and
Exchange Commission (BSEC) has already taken welcome steps with cautionary messages, financial
literacy promotion, and so forth. Some restrictions on margin loans against sponsors’ shares and
shares with abnormally high price earning (PE) ratios may also be desirable. BB is also responding
with intensive monitoring about banks abiding by statutory limits on their capital market exposures.
BB may also direct banks to prevent diversion of business and consumer loans into stock markets
and remains ready to take prompt policy actions.
BB is for quite some years now promoting inclusive, green financing (targeting SME, agriculture and
green initiatives), fostering financial sector wide a socially responsible financing ethos. BB has now
taken up a consultative initiative of formulating Guidance Notes on the do's and don'ts of socially
responsible financing to better foster social cohesion, with output initiatives that promote
entrepreneurship, create more and better jobs, and protect environment."