Assignment on

Monetary Policy of Bangladesh

Course Name: Macroeconomics

Course Code: MBA-510

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 Monetary Policy

Monetary policy is the branch of macroeconomic policy laid by the central bank. This policy
undertaken by central bank controls the money supply to maintain a healthy economic growth.
The regulation of the money supply and interest rates by a central bank, such as the Central Bank
of Bangladesh in order to control inflation and stabilize currency. Monetary policy is one the two
ways the government can influence the economy. By affecting the effective cost of money, the
Bangladesh Bank as a controller of monetary policy can affect the amount of money that is spent
by consumers and businesses.

Monetary policy is the process by which the monetary authority of a country controls the supply
of money, often targeting a rate of interest for promoting economic growth and stability. The
official goals usually include relatively stable prices and low unemployment. . Monetary theory
provides insight into how to create optimal monetary policy. Monetary policy is the process by
which the government, central bank, or monetary authority of a country controls.

− The supply of money,

− Availability of money, and
− Cost of money or rate of interest to attain a set of objectives oriented towards the growth
and stability of the economy.
− Monetary theory provides insight into how to create optimal monetary policy.

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 Objectives

These are the general objectives, which every central bank of a nation tries to attain by
employing certain tools of a monetary policy.
 Rapid Economic Growth
 Price Stability
 Exchange Rate Stability
 Balance of Payments (BOP) Equilibrium
 Full Employment
 Neutrality of Money
 Equal Income Distribution

 Rapid Economic Growth- It is the most important objective of a monetary policy. The
monetary policy can influence economic growth by controlling real interest rate and its
resultant impact on the investment.
 Price Stability- The monetary policy having an objective of price stability tries to keep
the value of money stable. It helps in reducing the income and wealth inequalities.
 Exchange Rate Stability- Exchange rate is very volatile leading to frequent difficulties
in the exchange rate, the international community might lose confidence in our economy.
The monetary policy aims at maintaining the relative stability in the exchange rate.
 Balance of Payments (BOP) Equilibrium- The BB through its monetary policy tries to
maintain equilibrium in the balance of payments. The BOP has two aspects i.e. the 'BOP
Surplus' and the 'BOP Deficit'. If the monetary policy succeeds in maintaining monetary
equilibrium, then the BOP equilibrium can be achieved.
 Full Employment- 'Full Employment' stands for a situation in which everybody who
wants jobs get jobs. However, it does not mean that there is a Zero unemployment. In that
senses the full employment is never full. Monetary policy can be used for achieving full
employment. If the monetary policy is expansionary then credit supply can be
encouraged. It could help in creating more jobs in different sector of the economy.

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  Neutrality of Money- The monetary policy should regulate the supply of money. The
change in money supply creates monetary disequilibrium. Thus, monetary policy has to
regulate the supply of money and neutralize the effect of money expansion.
 Equal Income Distribution- Monetary policy can make special provisions for the
neglect supply such as agriculture, small-scale industries, village industries, etc. and
provide them with cheaper credit for longer term. This can prove fruitful for these sectors
to come up. Thus in recent period, monetary policy can help in reducing economic
inequalities among different sections of society.

Objectives of Monetary policy in Bangladesh

The primary objective of the Monetary Policy of Bangladesh is to outline the formulation and
implementation of monetary policy of the Bangladesh Bank (BB), and to convey its assessment
of the recent and the expected monetary and inflation developments to the stakeholders and the
public at large. The Bangladesh Bank Order of 1972 outlines the main objectives of monetary
policy in Bangladesh, which comprises-
 To achieve the price stability and regulate currency and reserves.
 To promote and maintain a high level of production, employment and real income, and
economic growth, since independence BB operated under a variety of pegged exchange
rate systems amid capital controls.
 To manage the monetary and credit system.
 To maintain the par value of domestic currency.
 To promote growth and development of the country’s productive resources in the best
national interest.
Although the long-term focus of monetary policy in Bangladesh is on growth with stability,
the short-term objectives are determined after a careful and realistic appraisal of the current
economic situation of the country. Inflation Target It is the general wisdom that monetary
policy tools are of immediate influence in controlling inflation.

However, contemporary evidence amply illustrates monetary policy cannot deal well with the
inflationary impact of external shocks such as the recent international price of oil moreover,

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 related energy products. Many central banks consequently focus on the core inflation, which
is typically constructed by subtracting the most volatile components (food and energy prices,
indirect taxes etc.) from the consumer price index (CPI). The Bank of Canada argues that it is
the core concept that better predicts the underlying price stability in the economy. Hence as a
policy goal, core inflation may be a more credible target than CPI inflation.

While there is no standard measure of core inflation in the Bangladesh context at this time,
the construction methodology is made complex by two facts. First is that food items
constitute nearly 60 percent of the CPI index, and while the appropriate commodity group
weights may require a re-think, to ignore food entirely in defining the core inflation may
render the construction a bit like ‘throwing the baby away with the bath water.

Tools of monetary policy

To accomplish its monetary policy, the central bank of a country can use a mix of direct and
indirect policy tools to influence the supply and demand of money.
Direct policy Tools-
 Interest rate controls: The central bank has the power to announce the maximum and
minimum rates of interest and other charges that domestic banks may impose for specific
types of credits and pay on deposits.
 Credit controls: The central bank can control the volume, terms and conditions of
domestic bank credit.
 Lending to domestic banks: Central bank may provide credit, backed by collateral to
domestic banks to meet their short-term liquidity needs as lender of last resort.

Indirect policy Tools-

 Reserve requirement.
 Secondary reserve requirement.
 Cash reserve requirement.
 Securities requirement.
 Open market operations.

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 Monetary policy of Bangladesh
The monetary policy stance and monetary program for FY20 have been drawn up in the global
and domestic economic context recapitulated in preceding section 3, with dual objective of
maintaining price stability and supporting inclusive, equitable and environmentally sustainable
job rich economic growth in tune with the government’s strategies and goals for sustainable
growth and development. The monetary policy stance for FY20 also take due note of
Bangladesh’s maturation as a fast growing developing economy pursuing soonest possible
graduation to upper middle-income country status. BB’s sector specific financing support
policies and programs will be adjusted where necessary to fit in with the framework of FY20
monetary program.

As customary, the FY20 monetary program is based on the 8.2 percent real GDP growth and 5.5
percent CPI inflation ceiling targets declared for FY20 in the national budget, as these targets
were adopted in consultative process participated by BB. Arithmetic sum of the targets of real
GDP growth rate and inflation ceiling constitutes the target rate for nominal GDP growth. BB’s
annual monetary programs make adequate room for money and credit growth for attaining the
targeted nominal GDP growth, appropriately adjusted to take account of any change in money
velocity. Broad money (M2) growth is used as intermediate target through which to influence
and limit price movements within the targeted inflation ceiling. Movements of M2 are in turn
influenced through changes in supply of reserve money (RM) from BB; aided further by changes
in BB’s Repo and Reverse Repo interest rates, cash reserve ratio (CRR), and statutory liquidity
ratio (SLR) for use as auxiliary instruments if and when needed. Monetary accommodation much
in excess of reasonable need for growth target attainment has to be avoided so as not to impair
attainment of the targeted inflation containment.

Annual broad money (M2) growth consistent with the targeted FY20 real GDP growth and CPI
inflation ceiling is estimated at 12.5 percent, which will accommodate domestic credit growth of
15.9 percent. Based on trends of recent past, the public and private sectors will use this room for
domestic credit growth to estimated extents respectively of 24.3 and 14.8 percent growth in
credit to the two sectors. Credit growth projected for the public sector looks much bigger than for
the private sector because of the later’s much bigger (7.3 times) absolute size. Net foreign asset

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(NFA) growth is projected to remain in positive in FY20, but lower than at end June FY19,
consistent with projections of FY20 bop outcomes.

Policy interest rates, CRR, and SLR

In 2018 private sector banks and financial institutions faced substantial liquidity stress from
household savings in bank deposit accounts being lured away into National Savings Scheme
instruments bearing high non-market yields. High import growth that year also created stress in
the interbank foreign exchange market, requiring BB’s USD sales to banks, which further
depleted their Ta ka liquidity. The state owned banks suffered less of liquidity stress because of
their greater access to public sector deposits. BB stepped in to address the Taka liquidity stresses
with measures including a 1.00 percentage point lowering of CRR from 6.50 to 5.50 percent of
total time and demand liabilities. Bop current account deficit narrowed substantially in FY19,
relieving stresses in the foreign exchange market; and the government has also taken up reform
measures in the NSC scheme.

As of now, both Taka and foreign exchange interbank are at ease, with banks no longer asking
for day-to-day BB intervention. With markets in comfortable balance and with the economy
running at full steam at sustained high growth rate, no easing in policy rates is advisable or
necessary. This is not to say however that sporadic pockets of liquidity stress do not or cannot
emerge occasionally in one weak bank or another; but these situations can be best handled on
case-by-case basis as and when needed.

It will be pertinent to mention here that BB is proceeding with preparatory work for adopting a
policy interest rate focused monetary policy regime in which changes in policy interest rates
exert direct impact on prices in the financial and real sectors, rather than indirectly through a
monetary aggregate (broad money) as in the policy regime now in use. The interest rate based
regime is in extensive use in the middle income and advanced economies. Properly implemented,
the new regime is expected to quicken and heighten efficiency in transmission of intentions of
monetary policies. IMF SARTTAC is extending technical assistance in BB’s ongoing
preparatory work.

BB maintains a good number of refinance lines supporting lending for productive pursuits in
various underserved economic sectors and population segments, solely with BB funds or in

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participation with development partners. Besides magnitude of incremental growth, BB’s focus
in growth support pursuits are also on such quality dimensions as inclusivity, job creation, and
environmental sustainability. In the past MPS issues, BB flagged unattended gaps in social and
financial inclusion of neglected niches of economic activities and livelihoods of neglected
population segments meriting focused attention of BB itself or of other relevant quarters, most of
those known to benefit from varying degrees of eventual new attention.

The vast expanse of the country’s uncharted informal economy is one area where coordinated
new thrust of efforts of BB, banks, mobile phone/smart card based payment service providers
can draw the self-employed individuals, MSMEs, micro merchants and others in the informal
sector into bank accounts in the formal economy for deposit, borrowing and other banking
services accessed through their mobile accounts/smart cards; relieving them hugely from high
cost services of MFIs and money lenders. Countrywide IT network infrastructure needed for
connectivity between bank accounts and the mobile phone accounts are already in place; and
substantial progress should be possible over the near term if the initiative is pursued in right
earnest.

Impact on Private Investment

The recently announced six-monthly Monetary Policy Statement (MPS) by the Bangladesh Bank
indicates that the monetary policy in Bangladesh has so far restrained the growth-conducive
productive economic activities by way of limiting access of the private sector to credit and
lowering the import of raw materials, intermediate goods and capital machinery.
The new monetary policy has been announced when the economy of Bangladesh is confronted
with the problems of a slowed-down growth rate of its gross domestic product (GDP), decline in
investment, depreciation of Taka, continuation of inflationary pressure, and faux pas in fiscal
management. No restrictive or contractionary monetary policy can address such problems
effectively, more so more in developing economy like that of Bangladesh.

The central bank has termed its current half-yearly MPS as 'balanced' monetary policy. This is
for the fourth time in a row the Bangladesh Bank has otherwise been pursuing such a monetary

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policy, which is, by essence, contractionary in nature, though it has variously styled those
policies as 'restrained,' 'expansionary' 'balanced' etc.
Private sector investment has already slowed down due to the higher lending rate. On the other
hand, after adjustment for the rate of inflation, the real rate of interest on deposits becomes much
lower than the nominal one. Depositors thus continue to supply loanable funds at lower costs in
real terms to banks. The letter are in a better position to reap gains out of this situation.

Implementation of the current monetary policy might face some major macroeconomic
challenges by way of not facilitating expansion of investment activities at the desired level. Such
a monetary policy can hardly serve the real needs of the economy. Rather, it has the potential to
widening further the savings-investment gap.

Conclusion
In view of formulating credible monetary policy to attain the achievement of economic objective,
the difficult part for the central bank is to distinguish, within ongoing inflation evolutions,
between short-term volatility and the underlying pressure of inflation. While it has now become
standard practice for most central banks around the world to monitor core inflation, no progress
has so far been made in Bangladesh context. The measure of core inflation developed in the
report has strong money induce characteristics and therefore, can credibly be used as a short or
medium term guide of monetary policy in Bangladesh.

References
1. http://www.bb.org.bd/monetaryactivity/monetary-policy-statements-fy-2019-20
2. https://www.jstor.org/monetary-policy-and-monetary-programming-in-bangladesh
3. https://mof.gov.bd/site/page/44e399b3-d378-41aa-86ff
8c4277eb0990/BangladeshEconomicReview
4. https://www.adb.org/countries/bangladesh/economy
5. www.cpd-bangladesh.org

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6. http://www.docshut.com/mnqtwn/monetary-policy-in-bangladesh

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