Submitted to:

Reefat Zaman Shourov

FORECASTING INTEREST Lecturer

IBA, University of Dhaka

Submitted by:

RATES Lubab Bin Abdullah

Roll: 55
BBA 28

Financial Markets and Institutions (F403) Date: 9th March, 2023

Forecasting Interest Rate
Overall Liquidity in the Market
Liquidity in the market has a significant effect on the interest rate. As idle funds increase in a market, the
interested rate falls as result due to the increase of the quantity of loanable funds in the market and vice
versa. The excess liquidity in the Bangladeshi banking sector was around 2 Lakh Crore in June of 2022
which The Bangladesh bank tried to control to maintain currency stability. In January 2023, excess
liquidity was only Tk 1,37,600 crore which has been reduced by Tk 8,128 crore due to central bank’s
massive sale of dollars, low deposit rates, dollar appreciation and large cash withdrawals by customers.

If money supply grows more, quantity of loanable

funds in the market increases – which then
reduces the interest rate and vice versa. As for the
money supply in Bangladesh, M2 for the end of
the first quarter of FY23 slowed to 8.4% - relative
to the target of 10% growth by December 2022.
This was due to the contraction of Net Foreign
Asset.

Forecasting liquidity in the market

To forecast how the how the general interest rate will move, it is important we forecast the liquidity in
the market. Liquidity in the market is dependent on the following factors:

i. Credit Growth vs Deposit Growth

Credit Growth: To accommodate increased government spending, the Bangladesh Bank
today increased its domestic credit growth forecast for the second half of 2022–2023 by 30
basis points to 18.5%. The central bank set an 18.2% target for loan expansion for the period
of January to June when it presented its monetary policy for the current fiscal year in June.
According to the new monetary policy of the central bank, it has now been set at 18.5% for
the period of January to June. The aim for loan growth in the public sector has been raised
from 36% to 37.7%, while the target for credit growth in the private sector has remained the
same at 14.1%. For December 2022, credit growth increased by 15.8% from November. This
credit growth would mean that there is a rise in demand for loans – indicating a rise in
interest rate.

Deposit growth: Banks deposits stood at Tk 14,89,169 crore in December 2022 – which is
5.66% growth compared to that of December 2021. However, this deposit growth was much
lower than that in recent years. In September 2022, Bank deposits fell for the first time since
2018. This is partly due to the high increase of commodity prices caused by the inflation.
High commodity prices means that saving has become considerably tougher and so deposits
in Banks have decreased consequently. This will reduce the quantity of loanable funds
supplied. As a result, interest rates will rise as well.
 A rise in domestic credit growth amid falling bank deposit growth contributed to a decline in
liquidity in the banking system private sector credit growth which increased gradually in
recent quarters is expected to be moderated soon as external trade related financing will be
lesser in coming periods as global commodity prices are declining.
ii. A/D Ratio
The A/D ratio is a measure of what percent of the deposits are given out as loans. The ADR
of September 22 was 76.23% - which increased by 1.43% from June’s 74.8%. The ADR
increase would mean banks are having to give out more of their deposits. This could either
mean deposits have decreased or demand for loans have increased. Either way, this has an
inverse affect on the liquidity of the market.
iii. Net Remittance Flow
Remittance influences the liquidity of the economy; a positive net remittance would mean
an increased liquidity since more money is coming in the country than going out. Workers’
remittance grew by 4.89% in the first quarter of FY23. This will have a positive effect on
liquidity.
iv. L/C Amount
The import payment of Bangladesh stood at $19.3B in Q1FY23. The 11.7% growth has
decreased compared to the high growth of 35.95% whereas export earnings growth was
11.89% - which is lower compared to the 33.45% increase in FY22.

From the graph we can see export growth is higher than import growth and so there is a
falling growth of LCs which would indicate an improving liquidity. It can also be seen in the
reduction of negative current account balance of the country – indicating an improve in
liquidity.
v. Foreign Exchange Rate
The negative balance of payment, the
geopolitical tension and the tightening
of the US Fed put a deprecating pressure
to the foreign BDT’s exchange rate. The
current dollar exchange rate stands at
BDT 105.46, which stood at around BDT
86-97 at the start of FY22. This led to
higher commodity prices and so people
had less incentive or chances to save
which in turn reduced the number of
 deposits leading to a higher ADR spread. This reduction in deposits will lead to a liquidity
crunch for the banks.
vi. Call Money Rate
The weighted average call money
rate of January 2023 rose to
6.66% from 5.53% in September
2022. An increase in call money
would mean that there is a
liquidity crisis among the banks –
which would also mean lower
quantity of loanable funds and
hence a high interest rate.

Overall Non Performing Loan in the Economy

The net NPL of the banking sector increased. This can be seen on the
graph as the ratio of net NPL to Total Loans has increased to 0.9% in
Q1FY23 from 0.49% in Q4FY22. As banks are not getting back the
money that they would have given out as loans and hence quantity of
loanable funds have decreased – leading to an increase in interest
rate.

Government & International Borrowings

The budget deficit in FY22 was 6.2%. The proposed budget deficit for FY23 is 5.4% - which means that
the budget deficit would decrease and changes in budget deficit has a direct relationship with interest
rate. As budget deficit decreases, so does the interest rate.

Monetary & Fiscal Policy

The CRR rate is the minimum amount of cash banks should

have in reserve. The CRR rate has been at a steady 4% from
FY22 to FY23 which means that interest rates will not be
affected by the CRR rate at the moment.

However, Bangladesh Bank’s monetary policy statement for

the FY 22-23 is a restrictive policy with tightening bias. The
repo rate and the reverse repo rate have both been increased
by 0.25%. This will mean that the quantity of loanable funds
supplied will reduce. This is expected to drive the interest rate
higher.
Yield Curve

From the yield curve of Bangladesh, we can see a rise in the graph for a 2 year bond which means
interest rate is expected to rise in the short run. A relatively flat graph indicates that interest rate is
expected to fall in the longer run.

Forecasting Decision

After analyzing, we have found that the drivers of interest rate are affected in the following ways:

 Liquidity has decreased.

 NPLs have increased.
 Monetary policy is restrictive with tightening bias.
 Upward sloping yield curve in the short run.

All of these drivers indicate that in the short run, interest rate is supposed to increase.

References

(2022) Bangladesh Bank Quarterly Vol XX, No 1. rep.