Assignment On Bangladesh Bank monetary policy Statement

Summary

Bangladesh Bank (BBs) July-December 2012 follow the contractionary monetary policy. contractionary policy to fulfill its primary mandate of preventing inflation. Contractionary monetary policy probably wouldn't be used unless the core inflation rate is more than the BBs Reserves 2% target inflation rate. BBs monetary policy has two major objectives: (i) maintaining inflation at moderate levels and (ii) supporting inclusive growth objectives of the Government. Bangladesh Bank mainly uses three tools decreasing the inflation they are BBs Reserve requirement, interest rates, and open market operations. First of all maintaining inflation at moderate level that means the inflation rate currently high and trying to decreases the inflation rate as well as decreases the money supply. That's because banks charge higher interest rates on their loans to compensate for the higher BBs funds rate. Businesses borrow less, don't expand as much, and hire fewer workers, decreasing demand. They are also less likely to raise prices, putting an end to inflation. Inflation has a detrimental impact on the people in the traditional understanding because it takes away their purchasing power. Inflation also has differential impact on different income groups according to their expenditure share on food and non-food items. The ongoing monetary policy has a commendable sympathy, especially towards the medium and low people, aiming at easing their lives through curbing inflation. However, macroeconomic theory implies that there is a short-term trade-off between inflation and unemployment. Thus, we can tap the opportunity of a short-term positive output and employment effect of high inflation through effective economic strategies. For developing countries the inflation elasticity of monetary contraction has been found to be quite low. We have again projected7.2% growth in the current fiscal year .Sharp depreciation of foreign exchange rate in the last fiscal year has contributed to triggering inflation, which is evident from data of the last 24 months. Even though depreciation is supposed to result in higher exports according to economic theory, we ended up with a mere 7% growth mainly due to resurgence of global recession from euro zone crisis. Another debate is whether we should continue to subsidise consumers of high income countries through incentives to our exports. On the other hand, international transactions become costlier due to higher exchange rate growth at around

15% while private credit grew at 18.4% against the target of 16%. Public sector credit witnessed significant growth at 31% against the target of 24.8% due to meeting up sudden need in the midst of widely perceived "crowding out" effect even though estimates show no such evidence in both short and long run (The daily star, July17, 2012). At the operational level a key coordinating body is the Cash and Debt Management Committee where representatives from Bangladesh Bank and Ministry of Finance meet regularly to discuss resource inflows, domestic and external financing outlook and key

operational issues related to Treasury auctions and foreign resource mobilization. More frequent interactions of this kind will improve overall liquidity management. Ensuring government borrowing from the banking system does not crowd out available liquidity for commercial banks will remain a key area of focus for BB and in FY13 we expect less devolvement to Primary Dealer Banks. Liquidity pressures on Primary Dealer banks will also ease if current inter-bank interest rates prevail in FY13H1 as this will stimulate demand for higher-yielding government securities. In light of the limited activity in the secondary market for government bonds, the current Treasury bill-bond issuance ratio could be revisited and tilted towards T-Bills in FY13.Second, BB will continue to focus on the quality/composition of private sector credit and on interest rate spreads. BB will aim to ensure that the composition of this credit is focused on productive sectors with an envisaged reduction in the share of consumer credit. SME and agricultural credit are expected to take a larger share of the loan portfolios of the banking sector in order to promote financial inclusion. Moreover interest rate spreads will be closely monitored and publicly disclosed on BBs website in order to promote a more competitive banking sector. Third, financial sector strengthening is essential for effective transmission of monetary policy. New loan classification and provisioning guidelines which banks will have to implement by H1FY13, will reduce asset-liability miss-match, bring loan classification and provisioning to international standards and strengthen financial soundness of individual banks. Fourth this monetary policy stance also aims to preserve the countrys prevailing external sector stability. In light of the subdued outlook for global trade BB expects a modest growth in foreign reserves in FY13. BB will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.