Dhaka, Bangladesh (BBN)-The Citigroup expects an upward movement in policy interest rates environment in Bangladesh with an overall goal to curb inflation proactively in the near future.
“While we continue to expect the Bank (central bank) to manage liquidity through shorter-term instruments as seen in recent months, explicit rate hikes can no longer be ruled out if inflation continues to surprise on the upside,” the US-based financial services company said in a report on ‘Asia Macro and Strategy Outlook’, released this week.
In May 2010, Bangladesh Bank raised the cash reserve requirement (CRR) by 0.5 percentage points to 5.5 per cent for the commercial banks aiming to curb inflationary pressure on the economy.
Under the new rules, the commercial banks have to maintain a 5.5 per cent CRR with the central bank from their total demand and time liabilities on a bi-weekly basis.
The Citigroup said the monetary policy is likely to be proactive. “While active management of liquidity would be imperative, moderating remittance inflows as well as a pick-up in investment activity would help curtail liquidity pressures,” it added.
The central bank has reiterated that it would remain ‘proactive in liquidity management operations and policy rate adjustments’ as warranted.
“….policy (repo and reserve repo) interest rates, cash reserve requirement and statutory requirements will be adjusted as and when warranted by unfolding trends of growth in broad money and domestic credit,” the central bank said in its latest monetary policy, released on July 19 this year.
The Bangladesh taka will likely to continue along a depreciating path, given still volatile exports, the Citigroup forecast, adding that an uptrend in inflation could prompt explicit tightening.
The Citigroup sees riots in Dhaka a growing concern, saying that a series of widespread protests by garment factory workers over low wages and poor working conditions towards the end of June this year.
Riots and vandalism by garment workers spread into mass protests in the capital of Dhaka, and prompted many owners to lockdown their factories.
The report also said garment workers in Bangladesh are amongst the lowest paid in the world. Monthly minimum wages are US$25 and have not been raised in 4 years.
The government however is expected to announce a new pay structure for the country’s 2.5 million apparel workers on Thursday.
“Recent strikes over wages and poor working conditions could hurt exports and production. While exports have seen a pick-up, textile exports are still in the red. Inflation could see an uptick,” it added.
The Citigroup expects gross domestic product (GDP) at 6.0 per cent in the fiscal year of 2010-11 (FY11) against its estimate of 5.7 per cent in FY10. “While trends are likely to be investment-led, our estimates are more conservative than the Bureau of Statistics’ provisional estimate of 6.1 per cent for FY10.”
“Key risks to our outlook include policy efforts towards infrastructure development, food security, and governance-related concerns,” the report noted.
BBN/SS/SI/AD-29July10-4:16 am (BST)