Integrate fiscal policy harmoniously with upcoming monetary policy

Bangladesh Bank is set to announce contractionary new monetary policies for the first six months of the fiscal year 2024-25, signaling significant changes in monetary policy. This includes adjustments in lending rates, addressing reserve constraints, and refining currency supply policies. These steps come at a time when the country is experiencing severe inflationary pressures.

Inflation has hovered around 10% for a solid 14 months in the country. Typically, one of the primary tools to control inflation is to raise interest rates. However, even with these increases, inflation has persisted, causing considerable hardship for low-income earners.

The primary task of Bangladesh Bank is to control inflation while ensuring the well-being of the people. Through periodic announcements of monetary policies every six months, the regulatory authority strives to achieve this objective. Accordingly, the central bank will announce new monetary policies around mid-July for the first half of the fiscal year 2024-25, aiming to control inflation sustainably.

Bangladesh Bank typically controls the money supply in the market by adjusting the amount of currency supplied. However, moving forward, there will be a shift towards an interest rate-based policy instead of the traditional money supply approach. This means controlling the flow of money in the market by adjusting interest rates, either increasing or decreasing them as needed. As a result, the crisis has become prolonged. Already, interest rates on bank loans have increased from 9% to 15%. Therefore, raising the policy rate could make money even more expensive. This could further increase loan interest rates. In addition, there is also instability in bank accounts. Several banks are struggling due to the crisis caused by the excess printing of money by the central bank. These factors are causing further headaches, necessitating immediate action.

The challenge for Bangladesh Bank is to simultaneously control inflation and promote economic growth. In this regard, due to certain constraints, it may not be feasible to adopt the desired level of monetary policy accommodation. The lack of coordination between fiscal policy and monetary policy is another issue in this country. The proposed budget has significantly increased both revenue income and expenditure. Fiscal policy has leaned towards expansionary measures while monetary policy has been more contractionary. Therefore, considering the current situation, it is necessary for stakeholders to align these two policies to work in harmony.