Dhaka, Bangladesh (BBN)- The central bank of Bangladesh has increased it’s policy interest rate after more than three years aiming to curb inflationary pressures on economy, officials said.

The interest rate on repurchase agreement (Repo) auction was re-fixed at 8.75 per cent on Wednesday from 8.50 per cent of the previous day for lending fresh funds to commercial banks and non-banking financial institutions (NBFIs).

“We’ve increased the interest on Repo auction aiming to curb inflationary pressures on economy,” a senior official of the Bangladesh Bank (BB), the country’s central bank told BBN in Dhaka.

He also said the central bank revised its interest rate policy considering the country’s overall economic situation.

A total of BDT 21.00 billion was injected on the day by the central bank through the Repo auction to ease pressure on liquidity in the inter-bank money market ahead of Eid-ul-Fitr festival, they added.

The BB’s move came after the Asian Development Bank (ADB) suggested that Bangladesh increase the bank interest rate and take a tight monetary policy to tame the inflationary pressure on the economy.

The market operators, however, said that the BB’s latest move would influence in the interest rates on both lending and deposit in the banking system.

“The raise in interest rate may discourage credit flow to the private sector in the near future,” a senior treasury official of a commercial bank told BBN in the capital, Dhaka.

Credit growth to the private sector had recorded a significant 25 per cent rise in the fiscal 2007-08 (FY08) against that of the previous year.

Credit to the private sector rose by 25.18 per cent to BDT379.62 billion in July-June period of FY08 from 15.12 per cent to BDT 197.98 billion of the previous fiscal, according to the central bank statistics.

The treasury official also said the BB’s latest move indicates that the central bank would gradually come back to tightening of monetary policy instead of an accommodative one.

The central bank of Bangladesh maintained an accommodative monetary policy for nearly one year aiming to achieve maximum economic growth through expansion of credit to the productive sectors while keeping inflationary pressures under control.

“Substantial risks are involved in the supply-side approach to stabilising the economy as its first-round effects of expanding credit without a quick or substantial supply response could trigger higher inflation,” the ABD said in its Asian Development Outlook 2008 Update, released Tuesday.

Bangladesh’s Consumers Price Index (CPI) inflation crossed the double digit level to 10.04 per cent on the point-to-point basis in June last from 7.44 per cent of the previous month.

The rate of inflation went up by 2.60 percentage points in June over that of the May, 2008, mainly due to increase in prices of food items, according to the Bangladesh Bureau of Statistics (BBS) data.

The Update also said there are also risks that policies and assumptions could be upset by higher-than-expected prices for international commodities and misjudgment about the second-round effects of the July 2008 fuel price hike.

“The central bank may need to raise interest rates to anchor inflation expectations and keep second-round effects under control,” the Manila-based multinational lender suggested.

BBN/SI/SS/AD-18September08-12:08 PM