Dhaka, Bangladesh (BBN) – The latest monetary policy statement (MPS) of the central bank may not rein in inflation because of the wrong diagnosis of the causes of continuous increase in prices, the Unnayan Onneshan said on Saturday.

The private research organization also said the inflation has occurred for two reasons, namely, domestic prices are increasingly tied to global prices due to the liberalization of trade and administered prices are adjusted to international prices, and a reduced emphasis on public distribution has induced an element of upward buoyancy in prices.

“These require harmonization of monetary policies with fiscal measures to address this ‘imported’ inflation, with expansion of domestic productive capacities,” the organization said in its latest Bangladesh Economic Update, released on Saturday.

On July 27 last, the Bangladesh Bank (BB) unveiled its half-yearly monetary policy aiming to contain inflationary pressures through discouraging credit flow to unproductive sectors and for speculative purposes including real estates and investments in stock market beyond affordable limits.

The Unnayan Onneshan also said that the policy instruments such as hikes of cash reserve requirement (CRR), repo rates induce cost of capital, and thereby may dampen investment, by increasing the cost of capital as the banks borrow at higher rates.

“Therefore, the central bank’s expectation of reduction of pressure on liquidity may not be materialized,” the Update added.

An increase in interest rate, consequentially, is expected to have a number of effects, the Update said, adding that a rise in higher cost of capital may induce declined investment as the cost of the capital will go up, as opposed to the BB’s expectation of reduction in pressure on liquidity.

The country’s inflation as measured by consumers’ price index (CPI) moved up further in the month of July mainly because of increase in prices of both food and non-food items.

The rate of annual average inflation went up by 0.31 percentage point to 9.11 per cent in July from 8.80 per cent of the previous month while the point-to-point inflation rate rose to 10.96 per cent from 10.17 per cent.

The food price inflation rose to 13.40 per cent in July last from 12.51 per cent of the previous month while that of non-food items reached 6.46 per cent from 5.73 per cent on point-to-point basis, according to the Bangladesh Bureau of Statistics (BBS) data.

BBN/SSR/SI-27Aug11-7:56 pm (BST)