Monetary Policies

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Monetary Policies are framed by the central bank bangladesh bank keeping in view the macro objectives, such as controlling inflation, enhancing growth and generating jobs, and alleviation of poverty.

While framing the monetary policy which usually lasts for the coming months, Bangladesh Bank takes into consideration global, domestic and macroeconomic conditions and outlook. Bangladesh Bank makes adjustment in its monetary policy if there is any major change in domestic and global economic situation within that next months.

It was observed by the Bangladesh Bank that 'while the global growth prospects remain highly uncertain in key trading partners the USA was showing recovery'. This helped Bangladesh in framing a monetary policy to support its economy.

Monetary policy takes especial care of inflationary pressure, the general price level and also of food price inflation. Monetary policy tries to tame inflationary pressure so that the economy does not face severe ups and down in its economic activities. Food and commodity price inflation are equally important especially for an economy where poor people are concentrated like in Bangladesh.

Bangladesh Bank designed its monetary policy for next six months to monitor credit and monetary expansion keeping in view the price situation and international reserves situation. The principal target of monetary control was broad money (M2), ie, the sum of currency in circulation and total deposits of money in banks. The targeted growth of M2 depend on the realistic forecast of the growth rate of real GDP, an acceptable rate of inflation and an attainable level of international reserves.

Domestic growth was projected at 7%. But Bangladesh Bank became cautious and considering various domestic conditions it expects a growth rate of 6.5% to 7%. Bangladesh Bank observed that 'agriculture output as well as industrial service sector performance suggests that if there is no change in the global environment this growth rate could be achieved'.

It was observed by Bangladesh Bank that 'near-term growth prospects in the major advanced economies appear to be weakening ... inflation in much of the regions remain stubbornly highly, driven up in developing Asia by higher food and fuel prices'. This was taken into consideration in framing the next six month's monetary policy.

Inflation averaging 10.70% in December 2011 is higher than 7.5% average projected in 2011/12. Bangladesh Bank has identified the following reasons as the causes for it, such as 'lagged transmission of higher global food prices, high domestic credit growth, and recent upward adjustments in energy and petroleum prices.

Bank rate, Open Market Operations (OMO), discount rate policy and Statutory Reserve Requirement (SRR) are used by Bangladesh Bank depending on situation.

Bangladesh Bank observes that the 'monetary growth targets for FY12 are on track establishing the credibility of the stance taken in the previous monetary policy statement'. It further states that in November 2011, reserve money growth and broad money growth (M2) were 15.4% and 17% respectively. This was much below the 16% Credit to the public sector remained high than projected in the previous MPS. It is further observed by Bangladesh Bank that extend of crowding out was limited. However, see Executive Summary of Monetary Policy Statement (January-June 2012 and for detail) limited borrowing by the public sector from the banking sector would have kept more room for the private sector.

Bangladesh's monetary stance in H2 FY12 after considering the recent developments in the global and domestic economic and political situation, Bangladesh Bank is eager to follow (i) a restrained growth path consistent with curbing inflationary and external pressures and at the same time (ii) ensuring adequate private sector to stimulate inclusive growth. The Bangladesh Bank further aims to contain reserve money growth to 12.2% and broad money growth to 17.0% June 2012. Bangladesh Bank also decides less market intervention only to avoid excessive volatility (see Executive Summary of Monetary Policy Statement (January-June 2012 and for detail).

Bangladesh Bank expects to follow some key policy measures to sustain the program: These are in short- i) there is scope for increasing private sector credit growth for productive investments; ii) Bangladesh Bank will ensure liquidity support for banks, so that productive credit growth is not crowded out; iii) Bangladesh Bank will focus more on monitoring interest rate spreads so that they remain below 5% except SME lending; iv) In order to reach the new external sector equilibrium, Bangladesh Bank expects to rationalize overall import demand needs; v) In order to ensure that savings is intermediated safely and efficiently in support of pro-poor growth strategies, Bangladesh Bank hope to take further steps to improve stability, and outreach of the entire financial system.

The current monetary policy is well backed by rational fiscal policy of the government. [Amirul Islam Chowdhury]

Bibliography Executive Summary of Monetary Policy Statement, (January-June 2012).