Tight monetary policy harming recovery

A Bangladesh Bank policy panel has concluded that keeping monetary policy this tight is starting to do more harm to Bangladesh’s economic recovery than good for controlling prices, a shift in thinking that led the central bank to cut its policy rate for the first time in six years recently.

The Monetary Policy Committee (MPC), meeting on July 30, recommended lowering the policy rate by 50 basis points to 9.5 percent. The BB acted on the recommendation the same day, bringing the rate, at which it lends to commercial banks, down from the 10 percent level it had held since October 2024.

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“Inflation is still higher than the medium-term target, and low domestic demand, weak private investment, and worsening growth prospects indicate that keeping a very strict policy could impact economic recovery more than it would help reduce prices,” the committee said, according to minutes of the meeting published by the central bank.

The reasoning marks a turn for a central bank that had held its rate at a record high for nearly two years to fight inflation, which has run above 8.5 percent on average since fiscal year 2022-23. Inflation eased to 9.16 percent in June, from 9.42 percent in May, but remains above the government’s target.

The MPC’s minutes credit the tight policy since mid-2024 with helping bring inflation down, strengthening the external sector, stabilising the exchange rate under a market-based system, and improving the overall effectiveness of monetary policy. But the committee said that phase has run its course.

Global inflation has largely normalised, the panel noted, international commodity prices have stayed broadly stable, and the taka-dollar exchange rate has held steady, sharply reducing the imported inflation Bangladesh faced earlier.

“Persistent domestic inflation is now driven primarily by structural and supply-side factors, including food supply disruptions, administered energy prices, market inefficiencies, and distribution bottlenecks, rather than excessive aggregate demand,” the minutes stated.

“Consequently, further monetary tightening would likely yield limited additional benefits for inflation while imposing increasing costs on growth and employment,” it added.

The committee also flagged exceptionally weak private sector credit growth, taking into account the combined effects of elevated borrowing costs and energy constraints, will continue to dampen investment and business confidence.

Weighing the trade-offs, the MPC judged that a modest cut from 10 percent to 9.5 percent would carry limited inflationary risk while supporting industrial production, employment, and broader economic activity.

“The committee therefore endorsed a more balanced monetary policy approach that supports both price stability and economic recovery,” the minutes said.

To improve the responsiveness, transparency, and effectiveness of monetary policy in a rapidly changing environment, the panel also recommended that the BB set monetary policy on a quarterly basis, rather than the current semiannual schedule.