Dhaka, Bangladesh (BBN)– The central bank unveiled second half-yearly monetary policy on Thursday with slashing policy rates for boosting investment, particularly in productive sectors, to achieve maximum economic growth in this fiscal year (FY), 2015-16.
“Balancing the latest output and price considerations, we maintain a cautious but supportive monetary stance,” BB Governor Dr. Atiur Rahman said while announcing the monetary policy statement (MPS) for the January-June period of the FY to help productive sectors for achieving sustainable economic growth with curbing inflation.
Under the latest monetary stance, the central bank firstly lowered the policy rates – repo and reverse repo – by 50 basis points to 6.75 and 4.75 respectively to realign policy rates with the market rates.
Secondly, broad money and private sector credit growth are projected at 15 per cent and 14.8 per cent, respectively, slightly lower than the last MPS target but higher than the actual outcome.
This policy recalibration – lower policy rate and prudent credit and broad money targets – can sufficiently accommodate growth without sacrificing the inflation performance, according to the BB governor.
“As always, we remain vigilant and ready to adjust our stance as facts on the ground and the outlook on the horizon evolve,” the central bank chief explained.
Incorporating both the domestic and external developments, the BB projects the annual economic growth target at 6.8-6.9 per cent and inflation will bring down to at 6.1 per cent by the end of FY 16 from the existing level.
“With continued political stability, growth could reach 7.0 per cent by the end of FY 16,” Dr. Rahman noted.
The BB governor also emphasized on adding another engine – domestic demand –along with the existing export-led growth model saying that the engine, which, fortunately, can leverage our demographics, tech-savvy youth, market size, and population density.
“Our growth will then be even more robust, fuelled by two engines – export and domestic demand. To avoid any confusion, let me stress: it is not either or; it is and,” the BB governor explained.
He also said for or these two engines, especially the domestic demand, to function properly, financial system has to play a critical role: ensuring that national savings rise and are then channelled to their most productive and equitable usages, not to the privileged bidders.
“It is not only higher but also more productive investment that we are after. This will also require further deepening our financial system,” Dr. Rahman observed.
The BB remains committed to serving the savers and the borrowers through better, regulation, supervision, policy innovation, and market development, he added.
The central bank places strong emphasis on improving governance and supervision to achieve higher financial intermediation efficiency. “The BB appointments of bank observers recently reflect that priority.”
In terms of market development, the central bank is working on making the bond market more accessible to domestic, foreign, and non-resident Bangladesh (NRB) investors, more liquid by upgrading market infrastructure and diversifying the domestic investor base, according to the BB governor.
In this context, developing pension fund and insurance industry will be important for mobilising longer-term fund, he said, adding that the upcoming issuance of IFC’s Taka bond will provide more resources for investment and provide a currency risk benchmark which will aid pricing of local currency bonds by the foreign investor.
“Our prudent monetary policy and regulatory support are designed to foster a sustainable development of capital markets. We are also working on issuing green bond to nudge our financial system to serve our environment,” Dr. Rahman said.
He also said the central bank continues to provide regulatory and supervisory support so that credit reaches the growth- and equity-rich sectors, like MSMEs and agriculture.
“Thus, we can magnify the growth and equity impact of credit through interventions in targeted, inclusive, and sustainable subsectors (e.g., agriculture, livestock, green products, apparel, leather etc.), while respecting the overall monetary targets.”
Going forward, the government’s renewed focus on developing agriculture and crop insurance will fill an important segment of financial inclusion – i.e., insurance, which can unlock credit and reduce vulnerabilities, according to the BB governor.
“As a developmental central bank, our view is that societies and pyramids are as strong as its base. Let’s continue working on the base of the pyramid; let’s make that pyramid strong by ensuring macro-financial and price stability. Let 2016 be the year of hope and confidence; the year of growth and investment,” Dr, Rahman observed.
Among other Deputy Governors of BB Abul Quasem, Abu Hena Mohd. Razee Hassan, SK Sur Chowdhury, Chief Economist Dr. Biru Pasksha Paul and Senior Economic Advisor of the central bank Dr. Faisal Ahmed also spoke on the occasion.