Half-yearly monetary policy unveiled
FE Report
"The new monetary policy will be realistic, restraining and consolidating in its core nature," the Bangladesh Bank (BB) Governor Dr. Atiur Rahman said, adding that the 'financial inclusion' strategy of the central bank will also be continued.
The central bank unveiled Wednesday its half-yearly monetary policy aiming to contain inflationary pressures through discouraging credit flow to unproductive sectors and for speculative purposes including real estates and investments in stock market beyond affordable limits.
"Monetary policies in fiscal year 2011-12 (FY12) will need to continue in the restraining stance on credit growth as pursued in FY11," BB governor told reporters at the central bank while releasing the monetary policy statement (MPS) for July-December period of the current fiscal year.
He also said, policies, as before, will selectively bear down on growth of credit for wasteful, unproductive and speculative uses while ensuring adequate credit flows for all productive pursuits in manufacturing, agriculture, trade and other service sector.
Under the new monetary programme, domestic credit growth will come down to 20 per cent in June 2012 from an estimated 27 per cent in June this fiscal while credit growth to the private sector will be brought down to 18 per cent next fiscal from an estimated level of 25.5 per cent in the current one.
"The BB will adopt such further policy steps, in consultation with lending institutions, as and when required, to discourage credit flows to unproductive and for speculative uses," the central bank said.
Explaining what the central bank would consider lending for speculative purposes in particular, BB Senior Consultant Mr. Allah Malek Kazemi said credit flows for purchases of land and apartments (flats), investments in shares beyond affordable levels and many other areas where bubble-and-bust situations prevail will be treated as credits for such purposes.
In FY11, the modest pool of predominantly short-term domestic savings was strained heavily by a spurt in longer-term credit demand for new private and public sector capital investments, much of which are normally expected to be financed with term borrowing and/or equity from external sources, the first half-yearly (H1) Monetary PolicyStatement (MPS) noted.
It also added that this kind of demand pressure on domestic credit must ease off, if excessive depreciation of Bangladesh Taka (BDT), balance of payment adversities, and liquidity difficulties of the lenders from asset-liability maturity mismatch are to be avoided.
"To this end, guidelines will be developed, in consultation with lending banks, requiring a major portion of capital costs of industrial projects to be borne from owners' equity, capital market debt issues and external term loans," it noted.
Senior Consultant of the BB Mr. Kazemi expressed his optimism about achieving the new monetary targets as near as possible to its goals, while noting that the central bank could not keep itself up to its monetary targets in FY11 because economic activities in the country picked up speed.
"We've provided repo facility to the commercial banks for facilitating smooth functioning of the money market," Mr. Kazemi said while replying to a query.
The central bank may apply its policy interest rates during the first half of FY 12, if necessary, to curb inflationary pressures through squeezing credit flow to the non-productive sectors and speculative purposes.
"We may revisit only our policy interest rates including repurchase agreement (repo) and reverse repo to curb inflationary pressures on the economy, if necessary," Deputy Governor of the BB Mr. Ziaul Hassan Siddiqui said while replying to a query.
Regarding lending rates, the BB governor said the gradual phasing out of lending rate caps to restore full flexibility of the interest rate regime will be accompanied by simultaneous tightening of close monitoring on rates of interest and charges/fees on banking services from viewpoints of competition and consumer protection.
"Consultations on modalities of activation of inter-bank market for funds of Islamic banks have been initiated and the activation of such a window will enhance utilisation efficiency of such funds," he added.
The central bank also said its day-to-day market interventions "infusing BDT and US dollar liquidity" will continue to be maintained at a level that is needed at a minimum, to keep markets functioning steadily without excessive volatility.
About the country's overall balance of payments (BoP) situation, the BB governor said the inflow of foreign funds including export proceeds realization has recently increased.
"We expect that the country's overall balance of payments position will remain at a stable level," he added.
The central bank, however, projected that the country's existing negative overall balance of payments situation would continue in FY 12 while current account balance might enter into a negative territory.
The overall balance of payments may come to US$439 million by the end of FY12 from an estimated level of $38 million in FY11 while current account balance stood at a deficit of $884 million from an estimated level of $564 million.
The country's inflation, as measured by consumer price index (CPI), rose to 8.80 per cent by the end of FY11, well above the 8.00 per cent level estimated in the revised FY11 national budget, mainly due to high and volatile food and non-food commodity prices in the global market.
The national budget for FY12 projected the annual average CPI inflation rate to come down to 7.5 per cent in FY12 from the end-FY11 level which was well above 8.80 per cent.
"Non-food inflation being already low, attaining the forecast about the decline of the CPI decline will depend mainly on moderation of domestic food prices. Such prices are now high and are rising under influence of global price trends, despite good domestic harvest and absence of any major supply chain disruption," the BB governor said.
The MPS said : "Observers expect moderation in global commodity price volatility in FY12 from the recent widespread adoption of fiscal and monetary restraints both in the advanced mature economies and the fast growing emerging economies, from inflation and financial stability concerns."
The BB governor also said increase of domestic non-food CPI inflation from possible upward revision of subsidized user prices of gas, power and fuel oil may, however, offset the easing off some upward pressures on domestic food CPI inflation, in line with the expected moderation in global commodity prices.
Attainment of the projected decline of domestic CPI inflation to 7.5 per cent in FY12 will, however, be subject to moderation in global commodity price trends, limiting of demand pressures from excessive liquidity expansion, and stable benign domestic environment with no major supply-side disruption, he added.
About the country's overall economic growth, the BB in its MPS said output and investment activities in the economy paced up substantially in FY11 after a couple of years in the context of a relative slowdown in the post-global crisis situation.
The Bangladesh Bureau of Statistics (BBS) estimated real gross domestic product (GDP) growth rate of the Bangladesh economy for FY11 at 6.66 per cent (very close to initial projection of 6.70 per cent), following 6.07 per cent growth rate in FY10.
"Power sub-sector output improved, while progress of the gas sub-sector needs further attention," the BB governor said, adding that industry sector had the strongest growth rate at 8.16 per cent in FY11 from 6.49 per cent in fiscal '10, supported by a strong growth -- at over 40 per cent -- both in exports and imports.
"Given the prevailing robust investment and growth momentum in the real economy, the 7.00 per cent real GDP growth targeted for FY12 will not be a very arduous task to accomplish, subject, of course, to internal and external environment remaining benign and stable, with major progress in easing off the power and gas supply shortages," Dr. Rahman noted.
The first-ever monetary policy statement was formally published by BB in January 2006 and the central bank of Bangladesh had declared then that it would publish it on a half-yearly basis, along with a half-yearly policy review. http://www.thefinancialexpress-bd.com/more.php?news_id=144283&date=2011-07-28
"The new monetary policy will be realistic, restraining and consolidating in its core nature," the Bangladesh Bank (BB) Governor Dr. Atiur Rahman said, adding that the 'financial inclusion' strategy of the central bank will also be continued.
The central bank unveiled Wednesday its half-yearly monetary policy aiming to contain inflationary pressures through discouraging credit flow to unproductive sectors and for speculative purposes including real estates and investments in stock market beyond affordable limits.
"Monetary policies in fiscal year 2011-12 (FY12) will need to continue in the restraining stance on credit growth as pursued in FY11," BB governor told reporters at the central bank while releasing the monetary policy statement (MPS) for July-December period of the current fiscal year.
He also said, policies, as before, will selectively bear down on growth of credit for wasteful, unproductive and speculative uses while ensuring adequate credit flows for all productive pursuits in manufacturing, agriculture, trade and other service sector.
Under the new monetary programme, domestic credit growth will come down to 20 per cent in June 2012 from an estimated 27 per cent in June this fiscal while credit growth to the private sector will be brought down to 18 per cent next fiscal from an estimated level of 25.5 per cent in the current one.
"The BB will adopt such further policy steps, in consultation with lending institutions, as and when required, to discourage credit flows to unproductive and for speculative uses," the central bank said.
Explaining what the central bank would consider lending for speculative purposes in particular, BB Senior Consultant Mr. Allah Malek Kazemi said credit flows for purchases of land and apartments (flats), investments in shares beyond affordable levels and many other areas where bubble-and-bust situations prevail will be treated as credits for such purposes.
In FY11, the modest pool of predominantly short-term domestic savings was strained heavily by a spurt in longer-term credit demand for new private and public sector capital investments, much of which are normally expected to be financed with term borrowing and/or equity from external sources, the first half-yearly (H1) Monetary PolicyStatement (MPS) noted.
It also added that this kind of demand pressure on domestic credit must ease off, if excessive depreciation of Bangladesh Taka (BDT), balance of payment adversities, and liquidity difficulties of the lenders from asset-liability maturity mismatch are to be avoided.
"To this end, guidelines will be developed, in consultation with lending banks, requiring a major portion of capital costs of industrial projects to be borne from owners' equity, capital market debt issues and external term loans," it noted.
Senior Consultant of the BB Mr. Kazemi expressed his optimism about achieving the new monetary targets as near as possible to its goals, while noting that the central bank could not keep itself up to its monetary targets in FY11 because economic activities in the country picked up speed.
"We've provided repo facility to the commercial banks for facilitating smooth functioning of the money market," Mr. Kazemi said while replying to a query.
The central bank may apply its policy interest rates during the first half of FY 12, if necessary, to curb inflationary pressures through squeezing credit flow to the non-productive sectors and speculative purposes.
"We may revisit only our policy interest rates including repurchase agreement (repo) and reverse repo to curb inflationary pressures on the economy, if necessary," Deputy Governor of the BB Mr. Ziaul Hassan Siddiqui said while replying to a query.
Regarding lending rates, the BB governor said the gradual phasing out of lending rate caps to restore full flexibility of the interest rate regime will be accompanied by simultaneous tightening of close monitoring on rates of interest and charges/fees on banking services from viewpoints of competition and consumer protection.
"Consultations on modalities of activation of inter-bank market for funds of Islamic banks have been initiated and the activation of such a window will enhance utilisation efficiency of such funds," he added.
The central bank also said its day-to-day market interventions "infusing BDT and US dollar liquidity" will continue to be maintained at a level that is needed at a minimum, to keep markets functioning steadily without excessive volatility.
About the country's overall balance of payments (BoP) situation, the BB governor said the inflow of foreign funds including export proceeds realization has recently increased.
"We expect that the country's overall balance of payments position will remain at a stable level," he added.
The central bank, however, projected that the country's existing negative overall balance of payments situation would continue in FY 12 while current account balance might enter into a negative territory.
The overall balance of payments may come to US$439 million by the end of FY12 from an estimated level of $38 million in FY11 while current account balance stood at a deficit of $884 million from an estimated level of $564 million.
The country's inflation, as measured by consumer price index (CPI), rose to 8.80 per cent by the end of FY11, well above the 8.00 per cent level estimated in the revised FY11 national budget, mainly due to high and volatile food and non-food commodity prices in the global market.
The national budget for FY12 projected the annual average CPI inflation rate to come down to 7.5 per cent in FY12 from the end-FY11 level which was well above 8.80 per cent.
"Non-food inflation being already low, attaining the forecast about the decline of the CPI decline will depend mainly on moderation of domestic food prices. Such prices are now high and are rising under influence of global price trends, despite good domestic harvest and absence of any major supply chain disruption," the BB governor said.
The MPS said : "Observers expect moderation in global commodity price volatility in FY12 from the recent widespread adoption of fiscal and monetary restraints both in the advanced mature economies and the fast growing emerging economies, from inflation and financial stability concerns."
The BB governor also said increase of domestic non-food CPI inflation from possible upward revision of subsidized user prices of gas, power and fuel oil may, however, offset the easing off some upward pressures on domestic food CPI inflation, in line with the expected moderation in global commodity prices.
Attainment of the projected decline of domestic CPI inflation to 7.5 per cent in FY12 will, however, be subject to moderation in global commodity price trends, limiting of demand pressures from excessive liquidity expansion, and stable benign domestic environment with no major supply-side disruption, he added.
About the country's overall economic growth, the BB in its MPS said output and investment activities in the economy paced up substantially in FY11 after a couple of years in the context of a relative slowdown in the post-global crisis situation.
The Bangladesh Bureau of Statistics (BBS) estimated real gross domestic product (GDP) growth rate of the Bangladesh economy for FY11 at 6.66 per cent (very close to initial projection of 6.70 per cent), following 6.07 per cent growth rate in FY10.
"Power sub-sector output improved, while progress of the gas sub-sector needs further attention," the BB governor said, adding that industry sector had the strongest growth rate at 8.16 per cent in FY11 from 6.49 per cent in fiscal '10, supported by a strong growth -- at over 40 per cent -- both in exports and imports.
"Given the prevailing robust investment and growth momentum in the real economy, the 7.00 per cent real GDP growth targeted for FY12 will not be a very arduous task to accomplish, subject, of course, to internal and external environment remaining benign and stable, with major progress in easing off the power and gas supply shortages," Dr. Rahman noted.
The first-ever monetary policy statement was formally published by BB in January 2006 and the central bank of Bangladesh had declared then that it would publish it on a half-yearly basis, along with a half-yearly policy review.
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