Monetary Policy Statement (MPS) Highlights H1'24

A summary of the main points of the Monetary Policy Statement (MPS) for H1'24 issued by the Bangladesh Bank (BB) on June 18, 2023. The MPS outlines the policy stance and measures of the BB in order to achieve its objectives of containing inflation, improving the current account balance, reducing exchange rate instability, protecting foreign exchange reserves and stabilizing the financial sector. The report also discusses the expected impact of the MPS on the capital market and the macroeconomic outlook of the country.

​Policy Measures to Contain Inflation and Exchange Rate Pressures
The BB has adopted a contractionary monetary policy stance with a transition from a monetary targeting to an interest rate targeting framework. The main policy measures are:

•  Increasing the policy rates by 50 basis points from 6.00 percent to 6.50 percent, with a symmetric corridor of ±200 bps consisting of a Standing Lending Facility (SLF) or the Special Repo rate at 8.50 percent and a Standing Deposit Facility (SDF) or the Reverse Repo rate increased to 4.50 percent from 4.25 percent. This is expected to curb inflation and reduce excess liquidity in the market.

•  Introducing a market-driven reference lending rate termed as the 'SMART' (Six-month Moving Average Rate of Treasury bill) with a margin applied for banks and non-bank financial institutions (NBFIs). This is intended to replace the existing lending rate cap regime and allow banks and NBFIs to set their own lending rates with a margin. However, there will be no changes in the interest rates applicable to credit card loans.

•  Adopting a unified and market-driven single exchange rate regime in order to ensure stability in the foreign exchange market. The BB will no longer fix any specific rate for buying and selling foreign currencies. The exchange rate will be determined by market forces, allowing it to fluctuate based on supply and demand dynamics.

•  Calculating and publishing Gross International Reserves (GIR) in line with the sixth edition of the IMF's Balance of Payments and International Investment Position Manual (BPM6) while keeping track of current practices of calculating and reporting total foreign assets. This is aimed at aligning with international standards and providing a comprehensive assessment of the country's forex reserve.

Through adopting an interest rate targeting framework, raising the policy rate to increase borrowing costs, eliminating the lending rate cap, and implementing a market-driven unified exchange rate regime, BB aims to contain rising inflation effectively, achieve stability in the foreign exchange markets, and improve balance of payment conditions.

Macroeconomic Outlook
The BB has maintained the target of 7.5% GDP growth rate and 6.0% headline inflation in FY'24, in line with the Government's fiscal policy while formulating its MPS. The BB has outlined containing inflation as top priority and conformed a tight monetary policy stance.

The BB has projected private sector credit growth rate for FY'24 at 11.0% reflecting BB's intention to support required investment in the productive sector and employment-generating activities to achieve the targeted GDP growth of 7.5%. Considering the government's budgetary borrowing target, the public sector credit growth is projected to reach 30.0% by June 2024.

The BB expects that both exports and remittance will grow by 10.0% and imports by 8.0% in FY'24. Moreover, they anticipated that the overall balance of payment will be at a surplus level in FY'24, owing to policy initiatives such as discouraging imports of luxury goods and other non-essential products and promotion of import substituting activities.

The BB has set growth projection for broad money for FY'24 at 10.0%, in line with the target for nominal GDP growth. The control of broad money growth will be achieved by setting the target for the policy interest rate and managing market liquidity through an interest rate corridor.

Capital Market Outlook
The MPS will have an anticipated impact on the capital market. Some of the factors that may affect the performance of different sectors and segments of the capital market are:

•  The BB has already allowed banks to maintain a lower general provision of 1.0%, instead of the previously imposed 2.0% provision, on unclassified amounts for loans extended to brokerage houses, merchant banks, and stock dealers. This measure is to enhance flexibility within the banking sector for investing in the capital market, with the goal of promoting stability within the capital market.

•  The BB acknowledged the role of capital market for long term economic development of the country and emphasized the development of the bond market.

•  Listed manufacturing companies which are highly leveraged may exhibit decreased profitability due to higher interest expense. However, listed manufacturing companies with higher FDR at banks and NBFIs might have some positive impact on profitability due to probable higher net interest income.

•  Banks and NBFIs are expected to increase their interest rate spread, leading to higher profitability, due to the withdrawal of lending rate cap and introduction of market driven reference lending rate.

•  Listed companies which are highly reliant on imported raw material might face an increase in production cost due to higher exchange rate. However, listed companies that generate revenue from export might be positively impacted due to higher conversion rate of foreign currency.