BB unlikely to cut policy rate now

The Bangladesh Bank (BB) is unlikely to reduce the policy or repo rate for the second half of this year as inflation continues to remain stubbornly high, according to the central bank governor.

The central bank hiked the policy rate, at which it lends to commercial banks, in October last year to 10 percent.

This was the 11th time since May 2022 to make borrowing expensive and contain inflation, which has been above 9 percent for more than two years.

The BB kept the policy rate unchanged in its monetary policy for the January-June period of this year.

As it is going to announce the monetary policy for the July-December period by the end of this month, BB Governor Ahsan H Mansur said there is no such reason for reducing the interest rate.

"But there will be indications whether it is possible for the rate to be brought down soon; when we can expect the policy rate to fall, or how many days we may have to wait for it to go down," he said in an interview with The Daily Star yesterday.

The BB, in its monetary policy for the first half of this year, expected that inflation would decline to within a 7–8 percent range by end-June 2025 as the consumer price index had been easing gradually since November last, when it was 11.38 percent.

As of May, inflation on a point-to-point basis was 9.05 percent. The June inflation estimate is yet to be released by the Bangladesh Bureau of Statistics (BBS).

However, annual average inflation stood at 10.13 percent, much higher than the BB's target.

Mansur, a former official of the International Monetary Fund (IMF), said price data for June might be released in a couple of days and inflation may come down to below 9 percent.

I would expect inflation to fall within the 8 percent range, he said.

"I am a bit concerned about the recent spike in rice prices. It is unclear why prices are going up even after ample production," said the governor.

Mansur, who took the leadership role at the BB on August 14 last year, said his office aims to bring down inflation to 5 percent by the end of this fiscal year.

"Our target remains the same. The situation may change this way or that. But that does not mean that the goal will change now," Mansur said, "Our point is what we have to do to bring down inflation to 5 percent."

"But there will be some direction in the monetary policy and the BB, like other central banks, will shed light on some issues and give its observations regarding the economy."

In the current monetary policy, the BB said the real policy rate turned slightly positive in January 2025 for the first time in recent months as point-to-point inflation fell below 10 percent.

Mansur said the real interest rate stood at one percent in May this year as inflation fell below the policy rate.

"What I want is to increase the real interest rate to 3 percent or above. So, when inflation declines below 7 percent, we will see the gap and then we can bring down the policy rate" he said.

EXCHANGE RATE

In the interview, Mansur, who worked with Middle Eastern, Asian, African, and Central American countries during his stint at the IMF, also spoke on exchange rates and foreign currency reserves.

"We have tried to keep the exchange rate stable. We have been able to do so," he said.

Bringing stability to the exchange rate was necessary for two reasons. First, containing and reducing inflation to the targeted level.

"This is not possible to contain inflation if the exchange rate is unstable. Taka will depreciate and inflation will not increase; this is not possible."

According to the governor, stability in the exchange rate is also needed to give a message to all.

"Exchange rate stability is a major indicator of the stability of an economy. It creates trust. People keep confidence in a country that has a stable exchange rate. We have to take Bangladesh to that level."

The third reason is increasing the level of foreign exchange reserves.

Mansur said, "Our reserves declined to as low as $16 billion–$17 billion. Now it has increased to $26 billion as per the IMF calculation method."

"The main reason is that we have been able to keep the exchange rate stable. On the other hand, we did not sell a single dollar to the market."

"To accomplish this, we have utilised the interest rate as a supporting tool. Many said that it would not work. But it worked. We see the reflections in the falling inflation and succeeded in keeping the exchange rate stable," he said.

A dollar is sold at Tk 122–Tk 123 and there is improvement in the Balance of Payments. I think we had a surplus in the current account balance at the end of June, he said.

Mansur, replying to a question on the IMF's view that the exchange rate is not market-based yet, said the multilateral lender thought that the exchange rate would go up to Tk 135 once we go for a market-based regime.

"That did not happen."

He said they could have reached an agreement with the IMF in the October–December period of 2024.

"We did not because they were pressurising us to allow the market to determine the exchange rate. Had we done so at that time, it would have gone up to Tk 150 per dollar. We could not contain it given that set of circumstances."

The BB governor said the currencies of Pakistan and Sri Lanka lost value significantly when the nations accepted the IMF's conditions.

Pakistan's rupee fell to 370 per dollar. In Sri Lanka, the Lankan rupee fell to 280 per dollar.

"If I leave the exchange rate in an unstable environment, it's like leaving a child on the road amid risks of accidents. I didn't want to take that responsibility," he said, "We said we will make it market-based when the time comes."

Mansur, who began his career as a lecturer of economics at Dhaka University, said Bangladesh got the result.

"Like Pakistan and Sri Lanka, our exchange rate did not go up in the air. Ours is still standing on the ground, standing in the same place. There has been no intervention in the market. It is totally market-based."

"We have to understand our own economy. They (IMF) think in the light of the experience of other countries. They see it has been done in Sri Lanka, Pakistan and other places, why can't it happen here?"

He said the IMF released funds one and a half months after the BB introduced a market-based exchange rate.

"Even then, they are giving the statement that it is not yet fully market-based. We have nothing to do."