Bangladesh’s first quarterly monetary policy: is caution enough?

Bangladesh Bank’s first-ever quarterly Monetary Policy Statement is an important institutional change. Moving from half-yearly to quarterly reviews should make monetary policy more responsive to rapidly changing domestic and global conditions. But greater frequency will matter little unless policy becomes more effective in addressing Bangladesh’s difficult combination of persistent inflation, weak investment and financial-sector stress.

The decision to keep the repo rate unchanged at 9.5 percent is understandable. Headline inflation declined to 8.26 percent in August, but non-food inflation remained stubbornly high at 9.32 percent. Higher fuel prices and the possible implementation of the new pay scale create additional inflationary risks. Another rate cut at this stage could therefore have been premature.

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The larger concern is monetary transmission. Private-sector credit growth was only 4.75 percent in August despite substantial liquidity in the banking system. Bangladesh Bank acknowledges that policy-rate changes are transmitted relatively quickly to market rates but not effectively to private credit and the real economy. This raises a fundamental question: how much can interest-rate policy achieve when the banking channel itself is severely impaired?

Here, banking reform deserved much greater prominence in the MPS. The statement recognises the problem: non-performing loans have reached 32.78 percent, capital erosion is significant, and liquidity is unevenly distributed across banks. Yet banking reform appears largely as one among several supporting conditions rather than as a central component of monetary-policy effectiveness. That understates the seriousness of the problem. Bangladesh’s banking sector accounts for around 90 percent of financial-sector assets, while weak governance, regulatory capture and related-party lending remain major vulnerabilities.

The policy challenge therefore extends beyond keeping rates high or cutting them. Bad loans must be recognised and resolved, weak banks must be restructured, connected lending must be disciplined, and bank supervision must be made credible. Fiscal policy must also reduce excessive dependence on bank borrowing, while exchange-rate flexibility and supply-side measures should complement monetary policy.

Quarterly reviews are a useful reform. But institutional frequency cannot substitute for institutional effectiveness. Unless banking reform becomes central to the monetary-policy framework, Bangladesh Bank risks adjusting the price of credit while the machinery that allocates credit remains fundamentally impaired.

The writer is a professor of economics of Dhaka University and the executive director of SANEM.