Monetary Policy of Bangladesh

The concept of Monetary Policy

Monetary policy is the concept of managing money in an economy to achieve the economic
goals of a country. According to the viewpoint of economists, monetary policy is the way of
managing the supply of money in an economy.Monetary Policy is the management of money
supply and interest rates adopted by the central bank to influence prices and employment for
achieving the objectives of general economic policy.The regulation of the money supply and
interest rates in order to control inflation and stabilize currency. Monetary policy works through
expansion or contraction of investment and consumption expenditure where an expansionary
policy increases the total supply of money in the economy more rapidly than usual and
contractionary policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is more times used in Bangladesh as traditionally used to try to combat
unemployment in a recession by lowering interest rates in the hope that easy credit will entice
businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid
the resulting distortions and deterioration of asset values.Monetary theory provides insight into
how to craft optimal monetary policy. Monetary policy differs from fiscal policy, which refers to
taxation, government spending, and associated borrowing.

Scopes of the monetary policy

Monetary policy concern with a wider range of factors, such as:

Short term interest rates

Long term interest rates
Exchange rates
Credit quality
Velocity of money through the economy
Bonds and equities (corporate ownership and debt)
Financial derivatives such as options, swaps, futures contracts, etc.
Government versus private sector spending/savings
International capital flows of money on large scales.
The goals of Monetary Policy in Bangladesh

Bangladesh bank as a central of the country mainly focuses two goals in each monetary
policy. These two goals are moderate inflation and sustainable growth. Inflation is not
fully controlled in an economy but it should be at a tolerable level for all. The other goals
of the monetary policy of the country are:

To regulate currency and reserves

To manage the monetary and credit system
To preserve the par value of domestic currency
To promote and maintain a high level of production, employment and real income
To foster growth and development of the country's productive resources in the best
national interest. Although the long term focus of monetary policy in Bangladesh is
on growth with stability, the short-term objectives are determined after a careful and
realistic appraisal of the current economic situation of the country.

Instruments of monetary policy

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The major instruments of monetary policy by Bangladesh bank are mainly two types. These
are:
1. Open Market Operation (Repo, Reverse Repo and BB bill auction)
2. Variation in Reserve Ratio
The instruments can also be classified as follows:

Bank rate policy /Rationing of credit

Open market policy / Direct action
Variation of reserve ratio/ Regulation of consumers credit
Moral persuasion
Publicity etc.

Analysis of Monetary Policy of Bangladesh from year 2012 to 2016

Monetary policy 2013 (January-June)
This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines
the monetary policy stance that BB will pursue in H2 FY13 (January-June 2013), based on an

assessment of global and domestic macro-economic conditions and outlook. This MPS was
preceded by productive consultations with a range of key stakeholders and web-based comments
were also received.
Target of Bangladesh Bank
GDP Growth target was 7.2%
Curb inflation to 7.5%
Private Sector Credit Growth Rate to 18%
Intermediate Targets
Target Adjustments in MPS
Broad money growth target reset to 17.7% from 16.5% in H1 FY13
Reserve Money Growth target reset at 16.1% from 14.5% earlier
Domestic Credit growth target revised Upward to 18.9% from earlier 17.2%
Private sector growth target of 18.5% from originally targeted 18%, with growth
reallocation
Impacts of the monetary policy
[

GDP Growth target was6.04% which is less than targeted 7.2%

Private Sector Credit Growth Rate has achieved to 17%

The inflation rate achieved 7.77% which declined from 10.96%

The average industrial sector growth was between 7.25-7.5% in FY13 which less than the
9.5% in FY12.

Monetary policy 2013 (July-December)

This issue of the Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines
the monetary policy stance that BB will pursue in H1 FY14 (July-December 2013), based on an
assessment of global and domestic macro-economic conditions and outlook.
Target of Bangladesh Bank
GDP Growth target was 7%

 Curb inflation to 7.5%

Private Sector Credit Growth Rate to 18%
Intermediate Targets
Target Adjustments in MPS

Broad money growth target reset to 17.2% from 17.7% in H2 FY13

Presently growth is 18.1%, hence BB is aiming to reduce it.
Reserve money growth target reset at 15.5% from 16.1% earlier
Domestic credit growth target set to 19.3%
Private sector growth target of 15.5% from previously targeted 18.5%, with growth
reallocation.

Impacts of the monetary policy

GDP Growth target was6.03% which is less than targeted 7%
Private Sector Credit Growth Rate has achieved to 11%
Average inflation has been declining steadily which was 7.53%

The average industrial sector growth was between 7.25-7.5% in FY13 which less than the
9.5% in FY12.

Monetary policy 2014 (January-June)

The monetary stance in H2 FY14 takes these recent economic and financial sector developments
into account and will target a monetary growth path which aims to bring average inflation down
to 7%, while ensuring that credit growth is sufficient to stimulate inclusive economic growth.
This would require a monetary program framework that limits reserve money growth to 16.2%
and broad money growth to 17% by June 2014. BB will have a ceiling on net domestic assets as
a key operating target. The ceiling for private sector credit growth of 16.5% has been kept well in
line with economic growth targets.

Target of Bangladesh Bank

GDP Growth target was 7.2%
Curb inflation to 6.5% (average inflation 7% )
Private Sector Credit Growth Rate to 16.5%
Impacts of the monetary policy
GDP Growth target was6.12% which is less than targeted 7.2%
Private Sector Credit Growth Rate has achieved to 16%

Inflation achieved 7.39%

Analysis of the economic purpose of outstanding loans

The share of loans to agriculture sector (from 5.5% in March 2013 to 5.8% in March

2014)
Trading activities has increased from 36.4% in March 2013 to 39.0% in March 2014
Industrial total outstanding credit decreased from 22.0% in March 2013 to 16.4% in

March 2014.
The share of working capital financing has grown (from 13.2% to 18.0% during this

period).
The share of construction loans has remained unchanged (at 9.5%) compared to a year
earlier.

Monetary policy 2014 (July-December)

A review of developments over the past six months suggests that most of these assumptions
materialized and solid progress was made towards achieving the key goals. The January 2014
MPS projected that economic growth would range from 5.8%-6.1% and BBSs preliminary
estimate released recently suggests that growth for FY14 was 6.1%. The last MPS also aimed
to contain reserve money growth to 16.2% and broad money growth to 17.0% by June 2014.
Latest data for H2FY14 shows that reserve money growth and growth of net domestic assets of
Bangladesh Bank remained within program ceilings. Broad money growth of 15.2% in May
2014 undershot program ceilings due both to lower public and private sector borrowing from the
banking sector. BBs facilitation of private sector trade credit from abroad led to some switching

to lower cost overseas financing with overall private sector credit growth, from both local and
foreign sources, amounting to 15.7% in May 2014. Domestic retail interest rates declined during
these six months but the spread between lending and deposit rates rose indicating that lending
rates have declined by less than deposit rates.
Adherence to the monetary program contributed to non-food point-to-point inflation falling from
9.09% in January 2013 to 5.16% in May 2014 though it rose to 5.45% in June 2014. Point to
point food inflation rose steadily from 5.02% to 9.09% during January 2013-May 2014 but fell to
8.00% in June 2014. Overall average inflation declined from 7.60% to 7.35% during H2FY14
largely driven by the decline in non-food inflation.

Target of Bangladesh Bank

Projecting growth of 7.2%.
Private Sector Credit Growth Rate to 16%
The targeted inflation was 6.5
Impacts of the monetary policy
[

GDP Growth target was6% which is less than targeted 7.2%

Private Sector Credit Growth Rate has achieved to 14.5%
Inflation was 7.35% which is close to the expectation.

Monetary policy 2015 (January-June)

The key objective of monetary policy H2 of FY 2014 is to make some adjustments in targets to
address reality and expectations with a focus on growth. It is an expansionary monetary
policy.The monetary policy of FY 2015 is comprised of strategy like an inflation controlling
money growth strategy, an internal demand boosting monetary plan, an investment friendly
monetary path and an inclusive growth framework. Simply high growth cannot be considerable
for an emerging economy like Bangladesh. Growth must be sustainable to ensure development of
economy. Growth must be long-lasting to fight poverty and to take the economy to the middle
income bracket by 2021. The activity base of growth must be expanded by empowering the
masses.

Target of Bangladesh Bank

Projecting GDP growth of6.5-6.8%
Private Sector Credit Growth Rate to 16%
The targeted inflation was 6.5%
Actions: The following actions are taken by central bank to achieve their monetary policy goals
Bangladesh Bank aimed at increasing supply of reserve money from 15.5% to 15.9% and
broad money from 16% to 16.5% at the end of FY2015
Bangladesh bank aimed at reducing the growth of private sector from 16.5% to 15.5% at
the end of FY2015.
Public sector credit (including Govt.) is targeted to increase from 12.9% to 25.3%.
Domestic credit growth target is increasing from 13.8% to 17.4%.
Banking governance will be increased further to minimize loan fault

Impacts of the monetary policy

GDP growth was over 6.51% that is very much close to target but cannot achieve target.
Inflation decline 6.62% to 6.4%

Monetary policy 2015 (July-December)

The monetary policy of H2 2015 is composed of strategy like stabilizing inflation at moderate
level and other macroeconomic policy pronouncements, supporting the public policy objectives
of inclusive, environmentally sustainable growth and maintaining orderliness in transition of
domestic currency exchange rate to new market equilibriums in response to pick up in
investment.The key objective of monetary policy H2 FY 2015 is moderation and stabilization of
CPI inflation alongside supporting output and employment growth. This is a restrictive monetary
policy.This is a growth supportive monetary policy that increases the level investments through
the strategy of selective easing.
Target of Bangladesh Bank

Projecting GDP growth of7.3%

Private Sector Credit Growth Rate to 16%
The targeted inflation was 6.2%
15% Broad money growth achievement

Policy Instruments by Bangladesh Bank

Liquidity support for banks through applicable policy instruments
Policy interest Rates
Actions: The following actions are taken by central bank to achieve their monetary policy goals:
For providing adequate support to achieve targeted growth and inflation central bank tries
to grow reserve money 16 percent and broad money 15.6 %.
Domestic credit will try to grow up to 16.5%, private sector credit up to 15% and public
credit up to 23.7% at the end of fiscal year 2016.
Policy interest rates will remain unchanged, but change will be happened when general
inflation and core CPI inflation decline at a substantial level.
This is not only a cautious but also a explicitly pro-growth monetary policy stance that
support the 7% growth target and the 6.2% percent inflation target for the fiscal year
2016.
Bangladesh Bank's supervisory vigilance on banking governance will be hardened further
to minimize on loan fault.

Impacts of the monetary policy

GDP growth was 6.51% that cannot achieve target due to slower growth of service sector.
The inflation achieved 6.19% that is very close to the projection.
Achievement of 14.2% Broad money growth

Monetary policy 2016 (January-June)

The Bangladesh bank has taken expansionary policy to boost investment and sustain
development goal in the economy. The main goal of this policy is increasing investment for
industrial growth across the country with moderate inflation. The central bank set flexible rate of
reserve ratios and
Tools used by central Bank

 Lowering state owned lending rate 1.5% to 2%

Repo and Reverse RepoLowered 6.75% and 4.75%
Target of Bangladesh Bank

Projecting GDP growth of6.8%

Private Sector Credit Growth Rate to 16%
The targeted inflation was 6.2%
15% Broad money growthachievement

Impacts of the monetary policy

GDP growth is7% which exceeds the projection and touches the top point of the GDP
growth rate in the country for the first time.
The inflation achieved 5.92%.

Monetary policy 2016 (July-December)

As a part of stimulating growth and investment for the fiscal year 2016 to 2017 the central bank
remain unchanged the expansionary policy to attain the macro stability and growth of private
sectors with reducing unemployment by flexible interest rate and reserve ratios.

Tools used by central Bank

Bangladesh Banks policy interest rates (repo, reverse repo rates) will continue to remain
unchanged at the current levels of 6.75 and 4.75 percent respectively.
Target of Bangladesh Bank
Broad money (M2) growth for FY17 is set at 15.5 percent, based on the FY17 GDP
growth and CPI inflation targets of 7.2 and 5.8 percent, respectively.
Domestic credit is projected to grow by 16.4 percent
Expected to keep FY17 CPI inflation at or close to the 5.8 percent target level
Impacts of the monetary policy

 GDP growth rate achieved 7.05% which touches the highest point of GDP growth rate in
the economy of Bangladesh.