Bangladesh Bank lifts interest cap to control inflation

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Bangladesh Bank on Sunday announced the monetary policy for the first six months of 2023-24 fiscal, lifting the interest cap on bank loans and raising the repo rate.

BB governor Abdur Rauf Talukder announced the monetary policy at 3:00pm on Sunday.

He said the policy rate or repo rate has been increased by 50 basis points to control inflation.

As a result, repo rate would increase to 6.5 per cent from 6 per cent. Besides, reverse repo rate, which will now be called the standing deposit facility (SDF), increased by 25 basis points to 4.50 per cent from 4.25 per cent.

Bangladesh Bank started raising repo rate last year to control inflation, sparking discussion on lifting the lending rate ceiling for commercial banks.

The new monetary policy reads Bangladesh Bank intends to introduce a market-driven reference rate for all types of bank loans, replacing the previously imposed lending rate cap, 9 per cent.

The new lending rate or reference rate, known as the 'SMART" (six-month moving average rate of Treasury bill), will be announced monthly through the BB website, with a margin applied for banks and non-bank financial institutions (NBFIs), according to new policy.

In practice, SMART plus a margin of up to 3.00 per cent will be applicable for banks and SMART plus a margin of up to 5.00 per cent will be applicable for NBFIs. However, the lending activities for CMSMEs and consumer loans may be subject to an additional fee of up to 1.00 per cent to cover supervision costs and there will be no changes in the interest rates applicable to credit card loans.

Bangladesh Bank said the initiative will contain inflation as well as the supply of additional currency.

The central bank will also adopt a unified and market-driven single exchange rate regime, allowing the exchange rate between taka and US dollar or any other foreign currency to be determined by market forces. So, Bangladesh Bank would no longer quote specific rates for buying or selling foreign exchanges, promoting stability in the foreign exchange market.

Bangladesh Bank will calculate and publish 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, according to the new monetary policy.