Reducing inflation is now the biggest challenge

In the first six months of the ongoing fiscal year 2024-25, Bangladesh Bank has announced a new monetary policy while keeping the policy interest rate unchanged. Additionally, the central bank has eased restrictions on opening import letters of credit. As a result, it is expected that the upward trend in bank loan interest rates will significantly slow down. These measures have been taken at a time when inflation in Bangladesh has reached an alarming level.

The question arises, where will this ongoing inflation lead? Will the prices of commodities continue to rise? Historically, when inflation exceeds 9 percent, it can take several years for it to come down. Bangladesh seems to be heading in this direction, which is very unfortunate. In the new monetary policy, the target for government loan growth has been increased to 14.2 percent, meaning the government will be able to take more loans from the banking sector.

Additionally, the central bank has announced that it will not increase the money supply by printing new money. Generally, Bangladesh Bank controls the money supply in the market by increasing or decreasing the supply of currency, but from now on, instead of such monetary supply policies, interest rate-based policies will be adopted. In other words, the money supply in the market will be controlled by raising or lowering interest rates. However, in June, Bangladesh Bank printed approximately 360 billion BDT and lent it to five Shariah-based banks and several conventional banks. This resulted in a reserve money growth of 7.9 percent in June, with a target to reduce it to 2 percent by December. Although the reserve money growth target was negative 1 percent until June.

The monetary policy states that Bangladesh's economy is facing several macroeconomic challenges that hinder economic stability and growth. These challenges come from both domestic and international sources, creating a difficult situation for policymakers. Therefore, Bangladesh Bank has adopted a contractionary monetary policy to control inflation, allowing for a balance that aligns with economic growth. The challenge for Bangladesh Bank is to control inflation while promoting economic growth simultaneously. We believe that due to some limitations, Bangladesh Bank has not been able to formulate the monetary policy at the desired level.

Another issue in the country is the lack of coordination between fiscal and monetary policies. In the new budget (2024-25), the amount of revenue and expenditure has been significantly increased. The fiscal policy has been expansionary while the monetary policy has been contractionary. However, under the current circumstances, both policies should be aligned. Additionally, there is the significant challenge of reducing inflation.