Dhaka, Bangladesh (BBN)– Bangladesh is set to shift its regime into interest rate targeting monetary policy instead of the existing monetary aggregate based policy to expedite monetary transmission mechanism in the country.
Fazle Kabir, governor of the Bangladesh Bank (BB), the country’s central bank, disclosed the major policy shift while unveiling the monetary policy statement (MPS) for the current fiscal year (FY) 2019-20 at a press conference held at the bank’s headquarters in Dhaka on Wednesday.
The interest rate-based regime is in extensive use in middle income and advanced economies, the central bank chief added.
Under the proposed monetary policy framework, the BB will announce a new policy interest rate for maintaining desired inflation and real economic growth, according to officials.
Besides, the policy interest rate will be used for managing money supply through injection and withdrawal of liquidity from the market as required, they said.
Under the mechanism, the central bank may monitor the inter-bank call money rate in between Repo and Reserve Repo rates.
They also said the policy rate will be treated as market clearing interest rate based on demand and supply.
Talking to the BBN, a senior official of the Bangladesh Bank (BB) said the monetary transmission mechanism will be effective subject to financing product development.
The existing interest rates on both lending and deposit will be influenced by the proposed interest-based monetary policy, according to the central banker.
He also said the central bank is now proceeding with preparatory work for adopting the policy interest rate focused monetary policy regime with technical assistance from the International Monetary Fund (IMF).
“We’re expected to introduce such interest rate-based monetary policy by the second half (H2) of the FY ’21,” another central banker said.
Senior economists suggested that bond market will have to be vibrant for the effective operation of the interest rate-based monetary policy.
They also said the interest rate-based monetary policy will be formulated taking inflation target into account because ensuring price stability is one of the prime responsibilities of the central bank.