Summary of the Last Monetary Policy Declared by

Bangladesh Bank

The last monetary policy summary of Bangladesh Bank, released in

June 2024, outlines the central bank's approach to managing the
country's economy. Here are some key points from the summary:

Monetary Policy Stance:

Cautiously Tight: The Bangladesh Bank maintained a cautiously tight
monetary policy stance for the first half of fiscal year 2025. This
means that the central bank is trying to balance economic growth with
controlling inflation.
Interest Rates: The policy (repo) rate was kept unchanged at 8.50
percent, while the standing deposit facility (SDF) rate remained at 7.0
percent, and the standing lending facility (SLF) rate stayed at 10.0
percent.
Quantitative Tightening: The central bank continued to implement
quantitative tightening measures, such as streamlining open market
operations, ceasing currency swaps among banks and the central
bank, and refraining from creating new money for government
spending.

Economic Outlook:
Growth: The Bangladesh Bank projected a real GDP growth rate of
7.0 percent for fiscal year 2025, which is slightly lower than the
previous year's growth rate.
Inflation: The central bank aimed to keep inflation within a target
range of 5.5-6.5 percent.
External Sector: The central bank expected a moderate improvement
in the country's external sector, with a projected current account
deficit of USD 5.88 billion for July-May of fiscal year 2024.
Key Challenges:
Inflation: The central bank continued to face challenges in
controlling inflation, which remained persistently above 9.0 percent
for an extended period.
External Sector Pressures: The country's external sector remained
under pressure due to various factors, including global economic
uncertainties and rising commodity prices.

Overall, the Bangladesh Bank's monetary policy for the first half of
fiscal year 2025 focused on maintaining economic stability while
addressing challenges related to inflation and the external sector. The
central bank remains prepared to take necessary policy actions if
required to achieve its objectives.

MAJOR CHANGES BETWEEN MONETARY POLICY OF

2023 AND 2024

The monetary policy of Bangladesh has undergone significant

changes between 2023 and 2024. Here are some of the key
differences:
1. Policy Rate:
 2023: The policy rate was increased by 50 basis points from
6.00 percent to 6.50 percent.
 2024: The policy rate was further increased by 50 basis points to
7.00 percent and then to 7.50 percent.
2. Inflation:
  2023: Inflation remained persistently above 9.0 percent for an
extended period.
 2024: Inflation marginally decreased to 9.72 percent in June
2024 from 9.74 percent in June 2023.
3. Foreign Exchange Reserves:
 2023: Foreign exchange reserves were under pressure and
declined.
 2024: The central bank took steps to improve foreign exchange
reserves, including increasing the policy rate and introducing a
reference lending rate.

4. Non-Performing Loans (NPLs):

 2023: NPLs remained a concern, with a rate of around 10
percent of outstanding credit.
 2024: The central bank introduced measures to address NPLs,
such as self-rescheduling for banks and granting the authority to
write off loans as Bad and Loss after three consecutive years.

5. Lending Rates:
 2023: Lending rates were determined by a reference lending rate
(SMART).
 2024: The SMART mechanism was abolished, and lending rates
became more market-based, determined by factors such as the
efficiency of banks, liquidity situation, market demand,
competitiveness, and bank-customer relationship.

Overall, the monetary policy of Bangladesh in 2024 has been more

focused on addressing inflation, improving foreign exchange reserves,
and managing NPLs. The central bank has taken a more proactive
approach to these issues, implementing measures such as increasing
the policy rate, introducing a new lending rate mechanism, and
providing incentives for banks to address NPLs.

Monetary Policy Instruments

Bangladesh Bank, as the central bank of Bangladesh, employs various

monetary policy tools to achieve its macroeconomic objectives. These
tools are primarily Repo and Reverse Repo used to regulate the
money supply, control inflation, and influence interest rates.
1. Open Market Operations (OMO)
 Treasury Bills and Bonds: Bangladesh Bank buys or sells
government securities in the open market.
o Expansionary Policy: Buying government securities
injects liquidity into the market, increasing the money
supply.
o Contractionary Policy: Selling government securities
absorbs liquidity from the market, decreasing the money
supply.
o Current Rate: The yield on government securities varies
depending on the maturity and risk profile. The current
rates can be found on the Bangladesh Bank website or
through financial news sources.

 Repo and Reverse Repo: The central bank lends money to

commercial banks against the collateral of government
securities.
 o Repo: Bangladesh Bank buys government securities from
banks with an agreement to sell them back at a higher
price later.
o Current Rate: The REPO Rate is currently set at 6.75%.

o Reverse Repo: Bangladesh Bank sells government

securities to banks with an agreement to buy them back at
a higher price later.
o Current Rate: The Reverse Repo is currently set at
5.75%.

2. Variation in Reserve Ratios

 Cash Reserve Ratio (CRR): Banks are required to maintain a
certain percentage of their deposits with Bangladesh Bank.
o Expansionary Policy: A decrease in CRR increases the
funds available for lending by banks.
o Contractionary Policy: An increase in CRR reduces the
funds available for lending by banks.
o Current Rate: The CRR is currently set at 4%.

 Statutory Liquidity Ratio (SLR): Banks are required to

maintain a certain percentage of their deposits in liquid assets,
such as government securities.
 Current Rate: The SLR is currently set at 14%.

3. Discount Rate
 The interest rate at which Bangladesh Bank lends money to
commercial banks.
 o Expansionary Policy: A decrease in the discount rate
encourages banks to borrow more from the central bank,
increasing the money supply.
o Contractionary Policy: An increase in the discount rate
discourages banks from borrowing from the central bank,
decreasing the money supply.
o Current Rate: The discount rate is currently set at 6.75%.
4. Moral Suasion
 Bangladesh Bank uses its influence and persuasion to influence
the behavior of commercial banks. It can issue guidelines,
requests, or even threats to encourage banks to adopt certain
lending practices or policies.

5. Exchange Rate Policy

 Bangladesh Bank can intervene in the foreign exchange market
to influence the exchange rate of the Bangladeshi Taka.
o Expansionary Policy: A depreciation of the Taka can
stimulate exports and reduce imports, boosting economic
growth.
o Contractionary Policy: An appreciation of the Taka can
reduce inflationary pressure and improve the balance of
payments.

6. Selective Credit Controls

 Bangladesh Bank can impose restrictions on lending to specific
sectors or industries to achieve certain policy objectives, such as
controlling inflation or supporting specific sectors.
By effectively using these tools, Bangladesh Bank aims to achieve its
monetary policy objectives, including price stability, sustainable
economic growth, high employment, and a stable financial system.
The choice of tools and their intensity depends on the prevailing
economic conditions and the specific goals of the central bank

By effectively using these tools, Bangladesh Bank aims to achieve its

monetary policy objectives, which include:
 Price stability
 Sustainable economic growth
 High employment
 Efficient allocation of resources
 Stability of the financial system
 Balance of payments equilibrium

Evaluating the Effectiveness of Bangladesh's Monetary

Policy: A Comprehensive Analysis

Understanding the Objectives:

To evaluate the performance of Bangladesh's monetary policy, it's
essential to first understand the key objectives set by the Bangladesh
Bank. These typically include:
 Price Stability: Controlling inflation to maintain stable prices.
 Sustainable Economic Growth: Promoting economic growth
without excessive inflation or deflation.
 Full Employment: Striving for a low unemployment rate.
  Balance of Payments Equilibrium: Ensuring that the country's
imports and exports are balanced.
 Financial System Stability: Maintaining a stable and efficient
financial system.

Key Indicators to Track:

To assess the performance of monetary policy, you can monitor
various economic indicators, including:
 Inflation Rate: The rate at which the general price level
increases over time.
 Economic Growth Rate: The percentage increase in a country's
GDP over a specific period.
 Unemployment Rate: The percentage of the labor force that is
unemployed.
 Interest Rates: The cost of borrowing money.
 Exchange Rate: The value of the Bangladeshi Taka compared
to other currencies.
 Money Supply: The total amount of money in circulation.
 Balance of Payments: The difference between a country's
exports and imports.
 Analyze External Factors: Consider external factors, such as
global economic conditions and geopolitical events, that may
influence the effectiveness of monetary policy.

Analysis and Evaluation:

 1. Compare Actual Outcomes with Targets: Assess whether the
actual values of these indicators align with the stated objectives.
For example, if the inflation rate is within the target range, it
indicates effective monetary policy.
2. Consider Leading Indicators: Analyze leading economic
indicators, such as consumer confidence and business
investment, to anticipate future trends and adjust monetary
policy accordingly.
3. Evaluate the Effectiveness of Policy Tools: Assess how well
the Bangladesh Bank has used tools like open market
operations, reserve requirements, and interest rate changes to
achieve its objectives.
4. Compare with International Benchmarks: Compare
Bangladesh's monetary policy performance with that of other
countries in similar economic situations.
5. Analyze External Factors: Consider external factors, such as
global economic conditions and geopolitical events, that may
influence the effectiveness of monetary policy.

Additional Considerations:
 Time Lags: Recognize that monetary policy often has a lag
effect, meaning its impact on the economy may not be felt
immediately.
 Trade-offs: Consider the potential trade-offs between different
objectives. For example, achieving low inflation may require
sacrificing some economic growth in the short term.
 Public Perception: Gauge public perception and confidence in
the central bank's monetary policy.
By carefully analyzing these factors, Bangladesh bank can gain a
comprehensive understanding of how Bangladesh's monetary policy
has performed and identify areas for improvement.