Monetary policy issue of Bangladesh Bank

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As the covid-19 pandemic unfolded, central banks around the world responded with a dramatic easing of monetary insurance policy to supply liquidity support for the faltering financial activities.

Bangladesh Bank's (BBs) plan response was also similar, but measured regarding scope and extent based on the unfolding domestic economic circumstances. The injection of liquidity, within the government's bank-led monetary stimulus package, provides been sizable and viewed as absolutely essential in order to avoid any liquidity crunch throughout the market.

In the event, because of the ongoing surge in the officially measured inflow of staff' remittances and the decline in import repayments connected with economic slowdown, the exterior current account of the total amount of payments (BOP) recorded large surpluses and forex reserves of BB increased by a lot more than $11 billion to more than $43 billion by end-December. 

The strengthening of the BOP through the reserve buildup is a welcome expansion, although it is to a sizable extent an outcome of weak domestic demand and financial activity.

The implementation of the stimulus package led to injection of high-powered money in to the economy in the kind of BB's liquidity support (potentially up to Tk 60,000 crore). The inflows pressured BB to intervene in market to keep the exchange amount of the dollar against taka stable by preventing a substantial appreciation of the taka in the interbank foreign exchange market.

The interventions in the interbank forex and the counterparts of the large pandemic-induced foreign assist with the federal government (about $2 billion) injected large sums of liquidity in to the banking system.

The volume of high-powered money injected in to the banking system through the reserve buildup has been around the number of Tk 80,000-90,000 crore. The combined liquidity injection into the banking system from both of these sources alone already amounted to about Tk 1.4-1.5 lakh crore.

This rapid liquidity injections have already been happening at the same time when the growth in private sector credit demand has decelerated to 8.2 per cent, the lowest level within the last one 10 years or more. Huge corporates with strong personal standings are as well borrowing from abroad at much cheaper costs and restructuring their liabilities by substituting domestic debts with forex denominated debt at much cheaper interest rates.

Combined with massive slowdown in credit rating to the privately owned sector, the liquidity injection features contributed to a substantial liquidity overhang. For most banks the advances to deposits ratios attended down very well below the regulatory limit of BB.

The result is a collapse in the interest structure with deposit rates coming drastically below the inflation rate. The lending rates also have drop to levels not seen in several decades.

For very good corporates, the existing domestic borrowing rates are ranging between 5 per cent-7 %, well below the 9 % lending cap imposed by the federal government. 

Against this background, BB's monetary coverage committee will be reviewing the stance of monetary coverage and produce necessary adjustments for the coming months.

In this context, BB must understand: (i) what are "true sources" of the ongoing surge in staff' remittances; (ii) the point out of the true economy preferably predicated on surveys of essential economic sectors; (iii) conceivable implications of the surplus liquidity for domestic customer price index (CPI) and its own spillover results on the asset selling price inflation; and (iv) the outlook for the remittance inflows and domestic exclusive sector credit rating demand in the approaching months and their implications on the surplus liquidity in the amount of money industry. The remainder of this paper focuses on these issues so as to draw some plan implications for the concern of BB authorities.

Source: https://www.thedailystar.net

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