During the last few years, Bangladesh remained in the high-interest rate era. The interim government has been in power for around one year, but there is no sign of lowering interest rates. The interim government has assigned the responsibility of managing the country's economy and money market to the most renowned economist and money market specialist who are fully aware of the country’s economic condition and have expertise in undertaking appropriate policy decisions. So, people were naturally expecting that the governor of Bangladesh Bank will pursue expansionary monetary policy with a view to boosting the country's investment and economy. But nothing of that sort happened. Instead, the governor has resorted to contractionary monetary policy.
Since taking responsibility for the central bank, the governor, Dr. Ahsan H. Mansur, has repeatedly suggested keeping the high interest rate as long as inflation does not plummet down to the desired level. In this context, there is similarity between the governor of Bangladesh Bank, Dr. Ahsan H. Mansur and the chairman of Federal Reserve (Fed), Gerome Powel, as both are reluctant about lowering policy interest rates. However, the Fed's Chairman has already gone for rate-cutting a couple of times earlier, while the governor of Bangladesh Bank has never reduced interest rates.
As far as interest rate policy is concerned, Bangladesh Bank has set a unique example because they always walk in the opposite direction. They pursue low-interest rates when the whole world is in a high-interest rate era. Similarly, Bangladesh Bank pursues high interest rates when the whole world is in a low-interest rate zone. After COVID-19 pandemic and outbreak of Russia–Ukraine war, inflation shot up across the world and central banks of the developed world and even many developing countries resorted to rising benchmark rates to combat high inflation. During that turbulent period, Bangladesh Bank kept their policy interest rate low. Similarly, central banks across the world have started following low interest policy since last year and have gone for rate-cut several times, whereas Bangladesh Bank has decided to continue high interest rate. This approach is not only inconsistent with the international market but also detrimental to the country’s businesses, investment and economy.
Economic uncertainty and volatility created by Trump’s high tariff policy have encouraged central bankers of many countries to ease monetary policy and thus go for lowering interest rates. Australia’s central bank, the Reserve Bank of Australia, has lowered the benchmark rate by 25 bps (basis points) to 3.85% in May. New Zealand’s central bank, the Reserve Bank of New Zealand, has lowered its benchmark rate by 25 bps. New Zealand’s central bank has been periodically lowering their benchmark rate which has come down to 3.25% after the latest cut. Central bank of the UK, the Bank of England, has also cut benchmark rates in the last month and this was the third straight rate-cut in the current year which brought down the policy interest rate to around 4.25%.
Canada’s central bank, the Bank of Canada, has already lowered the benchmark rate straight three times to 2.75%. The European Central Bank has also cut benchmark rates a couple of times bringing it down to 2.25% this year. The Federal Reserve has been under tremendous pressure for lowering their benchmark rate, but the Fed is still observing the situation for the time being.
Alongside the developed world, many developing countries are also moving towards low interest policy. India’s central bank, the Reserve Bank of India (RBI), has recently lowered its benchmark rate by 50 bps to 5.50% easing their monetary policy. Indonesia’s central bank, Bank Indonesia, has cut its benchmark rate by 25 bps to 5.50% in the last week of May. While announcing the rate-cut decision, the governor of Bank Indonesia has affirmed that the bank is ready to take time-befitting decisions to expedite economic growth. So, economists and think tanks expect at least one more policy rate-cut during the current fiscal year.
China’s central bank, the People’s Bank of China, has also lowered the benchmark rate by 10 bps with an intent to stimulate domestic demand. Prior to the benchmark rate cut, China’s central bank has also lowered the interest rate on reverse repo agreement by 10 bps earlier last month. As a result of benchmark rate-cut, the one-year loan prime rate and the five-year loan rate have nosedived to 3% and 3.50% respectively in China. Not only developed countries with cooling inflation have resorted to low interest rates, but some countries with high inflation have also lowered interest rates. For example, Russia, which is a country with extremely high inflation, has also recently lowered interest rates.
The afore-mentioned data reveals that policy interest rate now ranges within 5.50% in all countries except Russia whereas policy rate in our country is almost 10%. What is more surprising is that the lending rate applied by commercial banks is around 15% or more. With such a high interest rate, no business can survive. Our business community is already plagued with various challenges and uncertainties, and they are not in a position to undertake any new investment decision due to high interest rates. If this trend of high interest rates continues, the country’s business sector will plunge into a deeper crisis. Its overall impact on the economy will be severe. Therefore, for the sake of investment and economic growth, Bangladesh Bank should consider lowering its policy interest rate.
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The writer is a certified anti-money laundering specialist and banker based in Toronto, Canada.
Email: [email protected]
