Why is Bangladesh Bank not concerned about inflation?

Riksbank of Sweden is considered to be the world's first central bank. It was established in 1668. The Bank of England was established even later, in 1694. When there was excessive inflation during the French Revolution, Napoleon Bonaparte established France's central bank in 1800 to manage the monetary policy. Central banks around the world have evolved since then, with the nature of work changing. But in modern economy, the function of the central bank was actually determined in the 1980's.

After World War II, from the mid-sixties the global economy saw a chapter of high inflation which continued on till 1982. This span of time is dubbed as 'The Great Inflation'. After Ronald Reagan became president, the US Federal Reserve Bank chairman Paul Volcker retrieved the economy from this situation. Interest rates were increased and monetary supply was decreased in order to bring inflation under control. The method of ensuring monetary stability by increasing or decreasing interest rates is known as the Taylor rule.

The basic role of the central bank in modern economy was determined from then. Since then these institutions have independently been carrying out the task of controlling inflation. Many central banks have established their transparency and accountability in this regard. If one logs on to the Bank of England website at this very moment, one will see it clearly written, the present inflation rate is 9.9 per cent and target 2 per cent. The Bank of Canada also displays the inflation rate prominently, presently 7 per cent. Similarly, the Reserve Bank of New Zealand displays that the inflation rate there is 9.3 per cent.

The Bank of England has made the matter of accountability even clearer. In 1997 they made the rule that if the inflation is not within target, open letters will be exchanged between the governor of the bank and the finance minister. In the letter, the governor must mention the reason behind the failure and what steps are being taken to meet the target. The last open letter was written on 16 June. A letter was issued by the finance minister at the time Rishi Sunak and the governor Andrew Bailey had to reply the same day. Anyone can read the letters on the website. According to the rule, the next letter must be written three months later, that is now, in the current month.

The central banks now have a monetary policy committee to draw up a good and effective monetary policy. Other than top officials, many central banks include experts on the committee too. For example, the Bank of England or the Reserve Bank of India. The Fed-related committee in the US is called the Federal Open Market Committee. The heads of the Fed are in this committee. The details of when the committee will meet, how it will determine the monetary policy, where it will be accountable, are all put down in writing.

There was a time when the central banks around the world had to devote a lot of time to managing exchange rates. After flexible exchange rate policies were put in place, most of the central banks have been freed of this and can now give full attention to controlling inflation. Instead of estimating how much inflation can be, they turn to inflation targetting. A report prepared by IMF economists has said that if success is to be attained in this regard, the central bank must have independence. It must have control on the method of reducing inflation. The central banks basically apply the monetary policy, that is, control the cash flow by increasing or decreasing interest rates.

It was the central bank of New Zealand that first started inflation targetting in the 1980's. Developed countries followed suit. Advanced and rising economies took this up after the recession of 1997. The target of most countries is to contain inflation within 2 to 3 per cent. Some countries like Brazil, Turkey, the Philippines, Guatemala and Indonesia's target is 4 to 5 per cent. This target doesn't change every year. No one has done so till now.

In Bangladesh, it is not Bangladesh Bank that determines the inflation rate. There is a bureaucracy-dependent financial, monetary and exchange rate coordination council and resource committee that estimates various indicators including inflation for the new financial year before the budget. The finance minister mentions this in his budget speech. The estimated inflation for the current financial year is 5.6 per cent. Bangladesh Bank's task is to publish a monetary policy every six months. This is done in a rather careless manner, simply because it has to be done. Bangladesh Bank has a monetary department headed by a deputy governor and they do this task.

The major problem in global economy at the moment is inflation. The IMF head Kristilina Georgieva on Wednesday said if inflation is not controlled globally, angry people will take to the streets. She feels that the rise of the right in many European countries is because of the economic crisis. Over 70 central banks around the world have increased interest rates in order to control inflation. It is common knowledge, after all, that it is the common people who suffer the most because of inflation. From history it is evident that this is the economic indicator that makes a political government unpopular. That is why there is so much discussion and so many initiatives about inflation around the world.

Only a handful of countries haven't increased interest rates to control inflation. Japan and Switzerland anyway have a zero interest rate policy. China is still following its 'zero Covid policy'. They are not so active in economy. Turkey had reduced interest rates, even though the country's inflation has exceeded 80 per cent. Bangladesh hasn't increased interest rates either.

Why is Bangladesh not increasing its interest rates? From the central banks deliberations it is evident that they feel, since this present inflation is due to a supply crisis, there is no use in increasing interest rates. Rather, investment is required in these difficult times. After Covid subsided, demand increased though supply was disrupted at the point where the economy was picking up. That was the first reason of the rise in inflation. Then the Russia-Ukraine war broke out, and inflation became the top most problem.

Looking at Bangladesh, it hardly seems that the government or Bangladesh Bank is bothered about inflation. On the contrary, the price of fuel oil has been increased by 51 per cent, out of concern of where the subsidies will come from. But the government has no interest in informing the public what impact this will have on inflation. September is almost ending and the inflation rate of August still has not been published.

Actually, just as Bangladesh Bank doesn't determine inflation rates, it doesn't have the independence to apply the monetary policy. The interest rate was fixed under pressure from the business community, to appease them. Bangladesh Bank didn't fix the 9-6 per cent interest rate and so basically they do not have the authority to increase it either. In Bangladesh, fixing the interest rate is no longer a matter of economy, it is a political matter. Whether to control the inflation in consideration of the general people a year or so before the election, or whether to keep the business people happy, that is a matter of political decision. Obviously, it does not bode well for the economy if politics enters economy. And no one in the world believes that interest rate is the only determinant for investment.

Low interest rate means giving loans cheaply. Cheap loans does not bring good investment to the country, it steps up high default loans. The present figures of default loans are proof. Cheap loans are increasing monetary flow in in the economy. This is creating additional demand which, in turn, instigates further inflation. And a part of this is being siphoned out of the country. Bangladesh Bank has opted for this path. The bottom line is, whatever may be said publicly, controlling inflation is not the first priority of the country. And this is most alarming for the common people.

* Shawkat Hossain is the Head of Online, Prothom Alo. He may be contacted at shawkat.massum@prothomalo.com*

This column appeared in the print and online edition of Prothom Alo and has been rewritten in English by Ayesha Kabir