Change in monetary policy last 5 years in Bangladesh

1. Change in Monetary policy last five years in Bangladesh perspective

Monetary policy 2011

Monetary policy 2011 (January-June)
The key objective of this monetary policy is to support governments goal of faster
inclusive economic growth and poverty reduction, besides maintaining monetary
and price stability. So this is a expansionary monetary policy.
Monetary Policy Approaches
BBs monetary policy 2011(Jan-Jun) affects consumer price levels by influencing
both key financial sector prices and broad money (M2) growth. For influencing broad
money growth, they changes reserve money as an instrument. Due to changes in
day to day cash money, cash reserve and statutory liquidity requirements (CRR,
SLR) are adjusted occasionally for influencing the broad money growth path. It is
also targeting to retain money stock relevance. Effectiveness of monetary targeting
decreases with increasing openness of capital account. The expansion of money
stock gets prevented by funds flows into or out of the domestic market.
Impacts of Monetary Policy:
The effect of monetary policy is as followings:
1. Agriculture sectors output activities are blooming in spite of harmful weather
conditions, due to timely access to inputs and financing support.
2. Exports returned strongly with 41 percent growth during July-December 2010,
due to increase in shipments to both traditional and newer destinations.
3. Quantum index of medium and large scale manufacturing increases 15.3 percent
in July 2010and small scale manufacturing weakened 9 percent because small
manufacturers cannot afford captive power generators to cope with supply
disruptions from the national grid.
4. Growth in workers remittance inflows weakened to a mere 0.21 percent H1 FY11.
5. Domestic credit growth kept on gaining pace in H1 FY11, rising to 24.2 percent in
November 2010 from 17.6 percent of June 2010. Growth in credit to public sector
remained small at 9.6 percent in November 2010, with credit to government and
credit to other non-financial public sector increasing 5.4 percent and 29.9 percent.
6. Global output growth in 2011 is somewhat less rising than earlier above four
percent growth. External sector risk factors and prospects for growth of Bangladesh
in 2011 remain unchanged.
7. Rising trends in global prices of food, energy and industrial commodities remain
the near term external source of concern impacting domestic inflation in H2 FY11.

8. Tax revenue collections by NBR during July- November 2010 grew by a

2. 24.81 percent with slower 8.3 percent. Non tax revenue receipts representing
income surpluses of SOEs reportedly declined 26.3 percent in H1 FY11, mainly due
to FY10 profit fall of BB and low revenue earnings of BTRC.
Monetary policy 2011 (July -December)
The key objective of this monetary policy is to expand the short term development
in domestic and global scenes and anchor the inflationary expectations of economic
sectors and general public. So this is a restrictive monetary policy.
Monetary Policy Approaches
For influencing real sector price level by financial sector prices BB apply policy
interest rate interventions and quantity based money stock targeting. Monetary
policy plan to achieve target growth path for broad money and implemented by day
to day management of growth paths of reserve money. This approach is not
succeeded due to inadequate well-functioning transmission channels of transmitting
financial prices to real sector prices in the domestic market.
Impacts of Monetary Policy: The effect of monetary policy is as followings:
1. Output and investment activity in the economy is increasing substantially. 2. GDP
growth is 6.66 percent for FY11which is very much close to target of 6.70 percent
and following 6.07 percent growth in FY 10. 3. Industrial sectors growth increasing
from 6.49 percent in FY 10 to 8.16 percent in FY11. 4. Service sector growth ups to
6.63 percent from previous year 6.47 percent. 5. Agriculture sector growth
decreases from previous growth 5.24 percent to 4.96 percent in FY11. 6. The
inflation increased in FY10 by 6.45 percent and in FY 10 1.47 percent. The annual
inflation rose to 8.80 percent that was targeted 8 percent by national budget.
Monetary policy 2012 Monetary policy 2012 (January June) The key objective of
this monetary policy is to anchor inflationary expectations and provide households
and firms sufficient information to plan their savings and investment decisions. So it
is a restrictive monetary policy. Monetary Policy Approaches The monetary will take
recent economic developments into account and pursue a restrained monetary
growth path in order to decrease inflationary and external sector pressures and
ensuring adequate private sector credit to stimulate inclusive growth. This
monetary policy
3. aim to bring inflation to single digits and stop foreign reserve depletion.
Bangladesh Bank focuses on govt. borrowing from banking system so that they
cannot crowd out liquidity from commercial bank. Bangladesh bank also aims to
contain reserve money growth to 12.2% and broad money growth to 17.0% by June
2012. Credit to the private sector is considered to remain at a healthy 16.0% well in
line with growth targets. Impacts of Monetary Policy: The effect of monetary policy is
as followings: 1. Global growth expectations in 2012 remain highly uncertain in key
trading partner countries due to increasing debt crisis in several countries and the
increasing related risk of a global recession. 2. Domestic growth was projected at
7% in the FY12 Budget assuming stable domestic and global economic conditions.

3. Agricultural output as well as indicators of industrial and service sector

performance suggests that if there is no change in the global environment then we
could be achieved targeted growth rate. 4. Inflation is 7.5% in the FY12 that was
lower than 10.7% projected in budget speech in FY 11. 5. The external sector is
facing a challenging environment which addressing this is an integral part of
Bangladesh Banks monetary stance. 6. Import growth more than export growth and
this gap in the current account balance cannot be fully met by remittance inflows.
Monetary policy 2012 (July to December) The key objective of this monetary policy
is to maintaining inflation at moderate levels and supporting inclusive growth
objectives of the Government. So it a restrictive monetary policy. Monetary Policy
Approaches The monetary will take recent economic developments into account and
pursue a restrained monetary growth path in order to decrease inflationary and
external sector pressures and ensuring adequate private sector credit to stimulate
inclusive growth. Bangladesh banks monetary program aims to contain reserve
money growth to 14.5% for FY 13 and broad money growth to 16% by December
2012. Credit to the private sector is considered to remain at a healthy 18%, above
other countries in the region, and enough to accommodate the FY13 GDP growth
targets. . Bangladesh Bank focuses on govt. borrowing from banking system so that
they cannot crowd out liquidity from commercial bank. Impacts of Monetary Policy:
The effect of monetary policy is as followings: 1. Domestic output growth was
projected at 7% in the FY12 Budget assuming stable domestic and global economic
conditions. Economic growth is 6.32% in FY12 which is lower than 6.71% in FY11due
to slowing of agricultural growth which has slowed from 5.13% in FY11 to 2.53% in
FY12.
4. 2. Industrial growth is estimated at 9.47% in FY12 higher than the 8.20% in
FY11due to easy access to timely credit. 3. Service sector growth of 6.06% in FY12
was lower than the 6.22% achieved in FY11. 4. In June 2012, inflation was 8.56%,
and average inflation was 10.6% both of which therefore remain higher than the
7.5% targeted in the 2011/12 Budget speech. 5. Export growth in FY12 remained in
positive territory with 5.93% growth and was helped by the depreciation of the taka.
6. The sharp slowdown in import growth (7.2% between July-May compared to the
same period last year, and a 6.3% fall in import L/C openings) and the healthy
growth in remittances (10.3% estimated in FY12) has improved the current account
balance in the past few months especially since the import slowdown is from a
larger base. 7. Remittances have been sustained by larger numbers of Bangladeshi
workers moving abroad over the past year and may have been helped by the
depreciation of the Taka. Remittance growth of 10.3% in FY12 is significantly higher
than the 6% growth in FY11. Monetary policy 2013 Monetary Policy Statement
(January to June 2013) This issue of the Bangladesh Bank (BB) half yearly Monetary
Policy Statement (MPS) outlines the monetary policy stance that BB will pursue in
H2 FY13 (January-June 2013), based on an assessment of global and domestic
macro-economic conditions and outlook. This MPS was preceded by productive
consultations with a range of key stakeholders and web- based comments were also
received. Impacts of Monetary Policy Inflation Data for the first half of FY13 suggest
that the achievement of these objectives is largely on track. Average inflation has
been declining steadily over the past nine months, from a peak of 10.96% in

February to 8.74% in December and within reach of the FY13 CPI inflation target of
7.5%. In food inflation fell from 10.9% in January 2012 to 5.57% in October 2012
though over the past two months it has crept back up again to 7.33% in December
2012. In non-food inflation has declined from a peak of 13.96% in March 2012 to
8.43% in December 2012 and average non-food inflation is following this trend with
a lag having peaked in October 2012 at 11.81% and gradually falling to 11.45% in
December 2012. Based on current trends the FY13 CPI average inflation target of
7.5% announced in the FY13 Budget appears achievable, though risks remain.
These risks stem from volatile global commodity prices and particularly the passthrough to food prices, any further administered price increases in the energy
sector, as well as the sharp increase in remittance inflows in H1FY13 (22%) which
will put upward pressure on asset prices and non-food inflation. Impact of GDP
Growth While BB forecasts that GDP growth in FY13 will be in line with the previous
ten years average, it will likely fall short of the 7.2% target set in the FY13 Budget.
5. In industrial sector growth at between 7.25-7.5% in FY13, in line with historical
averages, but less than the 9.5% in FY12. This slowdown is also reflected in the
breakdown of import data. While there is positive growth in capital machinery
imports between July-November 2012 of 2.5% compared to a year earlier, there was
a 5.2% decline in industrial raw materials, 3.2% decline in intermediate goods
imports and 1.6% decline in machinery for miscellaneous industries. In Service
sector growth in FY13 is projected at 6.2-6.5% which is higher than the 6.1% growth
in FY12 due to sharp increase in bank lending for key service sub-sectors as well as
insights from various service sector related proxy indicators in H1FY13. These sector
al assumptions lead to our forecasted output growth range of 6.1-6.4% for FY13. In
2013, global growth is expected to be 3.6% with the average for developing
countries is projected at 5.6%and high income countries at 1.5%. Target
Adjustments in MPS 7.7% from 16.5% in H1 FY13 target reset at 16.1% from 13.8%
earlier growth mestic Credit growth target revised Upward to 18.9% from earlier
18.6% reallocation agro and SME Expectations (MPS) H2 FY13 -7.5%
OBSERVATIONS: be a more realistic expectation however, increased Net Foreign
Assets may push inflation up if monetary targets overshoot further budget limit
Reduction in repo rate is expected to bring down interest rate further, thus
stimulating credit growth. However, actual growth will largely depend on change of
lending appetite among financial institutions Deferred implementation of loan
classification and provisioning guideline within 2013 will keep bank profitability low
in the year
6. however, contradicts to credit growth targets, as it requires stronger control over
loanable. Monetary Policy Statement (July to December 2013) This issue of the
Bangladesh Bank (BB) half yearly Monetary Policy Statement (MPS) outlines the
monetary policy stance that BB will pursue in H1 FY14 (July-December 2013), based
on an assessment of global and domestic macro-economic conditions and outlook.
Impacts of Monetary Policy Inflation Average inflation, has been declining steadily
over the past fifteen months, from a peak of 10.96% in February 2012 to 7.70% in
June 2013 within reach of the FY13 CPI inflation target of 7.0% because
Nevertheless, the central bank believes that existing aggregate demand pressure

coupled with expected wage increase and possible supply side disruptions in times
of nationwide strikes will make it very difficult to achieve the target. GDP growth
GDP Growth target of 7.2%.However, BB remains skeptical as to target growth
achievement under present economic conditions. BB expects the growth not to
deviate from the last 10 years average of 6.2%. Target Adjustments in MPS Broad
money growth target reset to 17.2% from 17.7% in H2 FY13 Presently growth is
18.1%, hence BB is aiming to reduce it. Reserve money growth target reset at
15.5% from 16.1% earlier Domestic credit growth target set to 19.3% Private
sector growth target of 15.5% from previously targeted 18.5%, with growth
reallocation. The Monetary Stance in H1 FY14 Takes these recent economic
developments into account and will target a monetary growth path which aims to
bring average inflation down to 7% They aim to target contain reserve money
growth to 15.5% and broad money growth to 17.2% by December 2013. The
space for private sector credit growth of 15.5% has been kept well in line with
growth targets and higher than the average of emerging Asian economies. The
monetary stance also assumes government borrowing from the banking sector will
remain around the FY14 budgetary figure of 260 billion taka. OBSERVATIONS
7. Monetary policy stance of H2 FY13 was largely kept Unchanged with some
adjustments in targets. GDP Growth target of 7.2% is highly unlikely under
present circumstances. BDT is expected to appreciate during H1 FY14. High
credit growth target compared to current (May 2013) growth aimed for H1 FY14,
signs stronger borrowing intent of the govt., which might affect interest rate and
crowding out effect.
Monetary policy 2014
Monetary Policy Statement 2014(January to June)
Impacts of Monetary Policy
Inflation
The July 2013 MPS explained that policy rates were being kept unchanged due to
the risks of inflationary pressures stemming from wage increases and supply-side
disruptions. The last MPS also aimed to contain reserve money growth to 15.5% and
broad money growth to 17.2% by December 2013. It also predicted that actual
private sector credit growth may not use up all the space provided in the monetary
program in the lead-up to the national elections. Latest data for H1FY14 shows that
reserve money growth and growth of net domestic assets of Bangladesh Bank
remained within program targets, despite a surge in Net Foreign Assets (NFA)
arising from robust exports and sluggish import growth. Broad money growth of
16.7% in November 2013 was close to program targets. BBs facilitation of private
sector trade credit from abroad led to some switching to lower cost overseas
financing with overall private sector credit growth, from both local and foreign
sources, amounting to 13.8% in November 2013. Domestic retail interest rates
declined during these six months with the spread between lending and deposit
rates dipping below 5% and its trend indicating that lending rates have declined
faster than deposit rates.

Adherence to the monetary program non-food point-to-point inflation falling from

7.40% in July 2013 to 4.88% in December 2013. However supply bottlenecks along
with rising food prices in India led to point to point food inflation rising from 8.14%
to 9.0% during the same time period. Average inflation rose from 6.99% to 7.53%
during H1FY14 driven by these higher food prices.
Monetary policy stance
The monetary stance in H2 FY14 takes these recent economic and financial sector
developments into account and will target a monetary growth path which aims to
bring average inflation down to 7%, while ensuring that credit growth is sufficient to
stimulate inclusive economic growth. This would require a monetary program
framework that limits reserve money growth to 16.2% and broad money growth to
17% by June 2014. BB will have a ceiling on net domestic assets as a key operating
target. The ceiling for private sector credit growth of 16.5% has been kept well in
line with economic growth targets.
First, BB will continue to focus on achieving its inflation targets 7% while providing
sufficient space in its monetary program for lending to activities which support
broad-based investment and inclusive growth objectives. BB will use both monetary
and financial sector policy instruments to achieve these goals
Second, BB has already taken a number of important financial sector policy steps
which will continue during H2FY14:
BB is willing to increase the size of the EDF if the current $1 billion fund is fully
utilized.
Banks were instructed to offer loan rescheduling facilities to genuine borrowers
who were temporarily affected by the recent disruptions
Third, The H2FY14 monetary program assumes that unanticipated spending
pressures arising from the provision of incentive packages to 14various industries
affected by recent disruptions will be accommodated within the sizeable (260 billion
taka) borrowing limit.
Forth, Strengthening financial inclusion and diversification- Overall there has been
a greater emphasis on providing services to rural clients by enforcing a 1:1 rural
urban new branch ratio (which was 1:4 prior to 2012) and this is reflected in a larger
share of rural deposits (18% of total deposits in 2013 compared with 13% in 2010)
and loans to rural areas (10% share in 2013 compared with 8% in 2010). BB is also
setting up a 2 billion taka refinancing facility to provide small loans to those lowerincome rural households who have set up ten-taka accounts.
Analysis of the economic purpose of outstanding loans
The share of loans to agriculture sector (from 5.5% in March 2013 to 5.8% in
March 2014)
Trading activities has increased from 36.4% in March 2013 to 39.0% in March
2014

 Industrial total outstanding credit decreased from 22.0% in March 2013 to 16.4%
in March 2014.
The share of working capital financing has grown (from 13.2% to 18.0% during
this period).
The share of construction loans has remained unchanged (at 9.5%) compared to
a year earlier.
Monetary Policy Statement 2014(July to December)
Impacts of Monetary Policy
Inflation
A review of developments over the past six months suggests that most of these
assumptions materialized and solid progress was made towards achieving the key
goals. The January 2014 MPS projected that economic growth would range from
5.8%-6.1% and BBSs preliminary estimate released recently suggests that growth
for FY14 was 6.1%. The last MPS also aimed to contain reserve money growth to
16.2% and broad money growth to 17.0% by June 2014. Latest data for H2FY14
shows that re serve money growth and growth of net domestic assets of Bangladesh
Bank remained within program ceilings. Broad money growth of 15.2% in May 2014
undershot program ceilings due both to lower public and private sector borrowing
from the banking sector. BBs facilitation of private sector trade credit from abroad
led to some switching to lower cost overseas financing with overall private sector
credit growth, from both local and foreign sources, amounting to 15.7% in May
2014. Domestic retail interest rates declined during these six months but the spread
between lending and deposit rates rose indicating that lending rates have declined
by less than deposit rates.
Adherence to the monetary program contributed to non-food point-to-point inflation
falling from 9.09% in January 2013 to 5.16% in May 2014 though it rose to 5.45% in
June 2014. Point to point food inflation rose steadily from 5.02% to 9.09% during
January 2013-May 2014 but fell to 8.00% in June 2014. Overall average inflation
declined from 7.60% to 7.35% during H2FY14 largely driven by the decline in nonfood inflation.
Monetary policy stance
Reverse repo operations grew significantly in the last few weeks of H2FY14
following a Government decision to temporarily suspend Treasury Bill auctions .As a
result, and in light of persisting inflationary pressures, BB decided to raise the Cash
Reserve Ratio from 6% to 6.5% in June 2014. Domestic credit growth fell short of the
anticipated rate due to shortfalls in both private and public sector credit growth.
First, The persisting inflationary pressures over the past few months with the risks
ahead related to the inflation outlook (described earlier) imply that achieving the
FY15 inflation target of 6.5% will be challenging. As such BB has decided to keep
policy rates unchanged. The Cash Reserve Requirement (CRR) was raised in June

2014 by 50 basis points to absorb part of the excess liquidity and help contain
inflation this remains unchanged.
Second, in order to support economic growth, BB has already taken a number of
important policy steps which will continue during H1FY15:
The size of the Export Development Fund was raised from $1.2 billion to $1.5
billion and this will be reviewed periodically in line with demand and productive use
of these funds. Moreover the single party ceiling was raised from $12 million to $15
million.
As an investment incentive, foreign investors are now allowed to source term
loans from local banks and access working capital as an interest free loan from their
parent company.
Third, Fiscal-monetary coordination will continue among senior policymakers with
regular meetings of a Coordination Council and at the operational level where one
key coordinating body is the Cash and Debt Management Committee which meets
quarterly.
Fourth, effective transmission of monetary policy requires well-functioning, broader
and deeper credit and debt markets. This in turn has a number of dimensions:
Promoting interest rate flexibility by tackling asset quality issues A number of
steps were taken in H2FY14 and will continue in the coming months to strengthen
the financial system and improve asset quality
Strengthening financial inclusion and diversification - Mobile phone financial
services are growing with 16.1 million account holders in May 2014. However these
are largely limited to payment services among individuals and going forward BB
would like to promote their use for government and business payments, as well as
broadening this into a wider range of banking services. Overall there has been a
greater emphasis on providing services to rural clients by enforcing a 1:1 rural
urban new branch ratio (which was 1:4 prior to 2012) and this is reflected in a larger
share of rural deposits (18.2% of total deposits in March 2014 compared with 13%
in 2010) and loans to rural areas (10% share in March 2014 compared with 8% in
2010). 14 million no-frill 10 taka accounts have been opened by the end of June
2014 compared with 13.2 million at the end June 2013. BB has also set up a 2 billion
taka refinancing facility via micro-finance institutions, to provide small loans to
those lower- income rural households who have set up ten-taka accounts.

Monetary policy 2015

Monetary policy 2015 (January-June)

The key objective of monetary policy H2 of FY 2014 is to make some adjustments in

targets to address reality and expectations with a focus on growth. It is an
expansionary monetary policy.
Monetary Policy Approaches
The monetary policy of FY 2015 is comprised of strategy like an inflation controlling
money growth strategy, an internal demand boosting monetary plan, an investment
friendly monetary path and an inclusive growth framework. Simply high growth
cannot be considerable for an emerging economy like Bangladesh. Growth must be
sustainable to ensure development of economy. Growth must be long-lasting to fight
poverty and to take the economy to the middle income bracket by 2021. The
activity base of growth must be expanded by empowering the masses.
Policy Instrument:
Liquidity support for banks through applicable policy instruments
Policy interest Rates
Policy Goals:
GDP Growth estimate of 6.5-6.8%
Keep inflation to 6.5%
Actions:
The following actions are taken by central bank to achieve their monetary policy
goals
Bangladesh Bank aimed at increasing supply of reserve money from 15.5% to
15.9% and broad money from 16% to 16.5% at the end of FY2015
Bangladesh bank aimed at reducing the growth of private sector from 16.5% to
15.5% at the end of FY2015.
Public sector credit (including Govt.) is targeted to increase from 12.9% to
25.3%.
Domestic credit growth target is increasing from 13.8% to 17.4%. Banking
governance will be increased further to minimize loan fault.
Bangladesh Bank will try to smoothing excessive fluctuations in the exchange
rate which will remain largely market based.
The central bank will continue to maintain sufficient amount of foreign currency
reserves to cover imports of 5 to 10 months
Impacts of Monetary Policy:
The impact of monetary policy is as followings
1. GDP growth was over 6% that is very much close to target but cannot achieve
target.

2. Inflation decline 7.3% to 7% but remain above target 6.5% due to increase in
inflation of non-food item.
Monetary policy 2015 (July-December)
The key objective of monetary policy H2 FY 2015 is moderation and stabilization of
CPI inflation alongside supporting output and employment growth. This is a
restrictive monetary policy.
Monetary Policy Approaches
The monetary policy of H2 2015 is composed of strategy like stabilizing inflation at
moderate level and other macroeconomic policy pronouncements, supporting the
public policy objectives of inclusive, environmentally sustainable growth and
maintaining orderliness in transition of domestic currency exchange rate to new
market equilibriums in response to pick up in investment.
Policy Instrument:
Liquidity support for banks through applicable policy instruments
Policy interest Rates
Policy Goals:
GDP Growth target of 7%
Keep inflation to 6.2%
Actions:
The following actions are taken by central bank to achieve their monetary policy
goals
1. For providing adequate support to achieve targeted growth and inflation central
bank tries to grow reserve money 16 percent and broad money 15.6 precent.
2. Domestic credit will try to grow up to 16.5, private sector credit up to 15 and
public credit up to 23.7 at the end of fiscal year 2016.
3. This is not only a cautious but also a explicitly pro-growth monetary policy
stance that support the 7 percent growth target and the 6.2 percent inflation target
for the fiscal year 2016.
4. Policy interest rates will remain unchanged, but change will be happened when
general inflation and core CPI inflation decline at a substantial level.
5. Bangladesh Bank's supervisory vigilance on banking governance will be hardened
further to minimize on loan fault.
6. This is a growth supportive monetary policy that increases the level investments
through the strategy of selective easing.
Impacts of Monetary Policy:

The effect of monetary policy is as followings

GDP growth was 6.5% that cannot achieve target due to slower growth of service
sector.
Inflation decline from 7% to 6.4% that is close to target but cannot achieve target
due to average increase in core inflation.