This post first appeared at the Dhaka Tribune
On January 27, the Bangladesh Bank announced monetary policy for January-June 2014. It decided to keep the policy rate unchanged at 7.25%, and saw no reason to change the reserve requirements either. The broad based monetary targets (M2, private sector credit growth, etc) did not see any major changes.
Before delving into the actual analysis of the monetary policy statement, I would first like to point out that the central bank has made remarkable improvements to the quality of the Monetary Policy statements. The articulation, use of data, and logic behind the monetary policy has improved to considerable length. It is now a real treat to read the monetary policy statement. Even though I don’t have any concrete information, I am inclined to believe that the addition of Hasan Zaman as the Chief Economist had a lot to do with it.
Now, let me go back to the analysis of the monetary policy. The MPS clearly highlights the central bank’s relatively cautious stance, as they feel that there are risks to inflation (7.35% YoY at December 2013). The economic activity can revive on its own without any monetary stimulus, as there is more than enough liquidity in the economy, and some of the political noise (strikes and blockades) have actually dissipated. Furthermore, the central bank has highlighted that they are proponents of more targeted incentives instead of broader monetary stimulus) to industries that were hurt by the political troubles.
Prior to the announcement of the monetary policy, when the political outlook was a little uncertain, I was under the impression that Bangladesh Bank could go for a modest policy rate cut of 25bps. While I completely agree that the rate cut would not have any marginally incremental affect on credit growth, my call was that it would have a signalling effect.
With the central bank having a more dovish stance investor confidence might go up just a bit. However, given that the probability of continuous strikes and blockades has come down and EU has also cleared up their present position on the GSP facility it seems to me that maintenance of the status quo in the monetary policy tools was the perfect decision.
I continue to reiterate that the central bank’s decision on monetary policy post 2010 was quite prudent, in my opinion. What is holding Bangladesh back cannot be solved by expansionary monetary policy (which would only create asset bubbles). The solution lies in solving the energy and infrastructural bottlenecks.