Dhaka, Bangladesh (BBN)- The Bangladesh Bank’s (BB) hike of key policy interest rate after three years was timely and would help rein in runaway inflation in the country, an International Monetary Fund (IMF) official said on Wednesday.
Jonathan Dunn, the IMF Representative in Bangladesh, said year-on-year credit growth has shot up to 26 per cent, fuelling inflation, which has been stubbornly perched at around 10 per cent since it broke through double digit in July 2007.
“The change in the policy rate is fully consistent with ensuring that the inflation expectations are anchored,” Mr. Dunn was quoted by the Financial Express (FE), the country’s lone financial daily, as saying. “And that the central bank through its policy actions will help to ensure price stability.”
His comments came hours after the Bangladesh Bank (BB) ditched its expansionary and the so-called accommodative monetary policy raising the repo rate — the short term key interest rate – by 25 percentage points to 8.75 per cent.
The BB’s move indicates that the central bank has adopted a contractionary monetary policy, making money costlier to discourage credit flow to the private sector in the near future, treasury officials said.
Mr, Dunn also said the policy change would send a good signal to the economy, already reeling under huge food price hikes.
“The policy move is sending a signal that it (Bangladesh Bank) is concerned about the inflation,” he added.
The IMF in its latest review of Bangladesh economy in July asked the central bank to tighten money supply, saying increasing inflationary pressures could threaten growth and further erode gains made in poverty reduction over the recent years.
“Early monetary policy actions to counter these pressures would anchor inflation expectations and reduce the need for more drastic actions later,” it said.
Unveiling the July-December half-yearly monetary a few days later, Bangladesh Bank rejected the IMF’s concerns, as it continued its long-standing accommodative monetary policy by keeping the policy interest rate unchanged, despite signs of substantial credit growth.
BB Governor Salehuddin Ahmed said in July the central bank kept its monetary policy unchanged as they were more concerned about boosting growth. He said the bank would use other instruments to tackle inflation.
The BB’s dramatic u-turn came a day after the Asian Development Bank (ADB) strongly suggested that the caretaker government should increase the bank interest rate and tighten money supply to tame inflationary pressure, the news reports said.