Only raising policy rate may not tame inflation

Only a slight rise in the policy rate, which is the rate at which the central bank lends money to commercial banks, may not tame inflationary pressure in Bangladesh as there are many reasons for elevated price levels, economists said yesterday.

They made the comments at a roundtable discussion on "Monetary Policy (January-June 2024)", organised by the Institute of Chartered Accountants of Bangladesh (ICAB) at its auditorium.

The Bangladesh Bank raised the policy rate by 25 basis points to 8 percent for the second half of the FY24.

Primarily, there was demand-pull inflation, but now it is turning into cost-push inflation, said Prof Shamsul Alam, a former state minister for the Ministry of Planning.

So, bringing inflation rate within the targeted level by only raising the policy rate will be tough, he said while speaking as the chief guest.

Alam also recommend reducing import tariffs in order to contain inflation, and reducing expenditure by lowering cost and time overruns for projects.

As the local currency was overvalued for a long time and the government did not opt for reforms in macroeconomic management, it is facing a hard landing instead of a soft landing, said Prof Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue.

Now, the central bank is planning for a crawling peg, but it needed to make the exchange rate mechanism market-based.

Initially, that may lead to higher inflation but ultimately it will reduce the price hike. The initial 'shock therapy' will be good for the economy in the long run, he said.

If the exchange rate becomes market-based, exports will be competitive and inward remittances through formal channels will be higher. So, there will be less pressure on the balance of payments, he added.

On one hand, the central bank announced a contractionary monetary policy, but on the other hand it is lending to some Islami banks by printing money, which is a contradictory measure since this money fuels inflationary pressure, said Ashikur Rahman, senior economist at the Policy Research Institute.

Due to poor governance in some banks, the central bank had to print money. So, the central bank should ensure good governance in the banking sector and take policies independently.

"The policy rate must match the inflation rate. It should not be lower than the inflation rate," he added.

Muhammad Abdul Mazid, a former chairman of National Board of Revenue, Mohammed Forkan Uddin, president of the ICAB, Kamran T Rahman, president of Metropolitan Chamber of Commerce and Industry, Ashraf Ahmed, president of Dhaka Chamber of Commerce and Industry, and Sajjadur Rahman, deputy editor of the Business Standard, also talked at the event.