In a strategic move to inject liquidity and stimulate private sector borrowing, Bangladesh Bank has slashed the policy interest rate by 1.5 percentage points-from 8.5% to 8%-effective Wednesday. The central bank made the announcement through a statement on Tuesday, signaling a shift toward an expansionary monetary stance aimed at reviving sluggish credit growth and restoring economic momentum.
The Monetary Policy Department stated that the revised policy is part of efforts to ease liquidity constraints and support credit flow across the banking sector. While the policy rate has been reduced, the overnight repo rate remains unchanged at 10%, and the Standing Lending Facility (SLF) rate stays at 11.5%. This decision comes amid declining private sector credit growth, which stood at just 7.17% in May-down from 7.50% in April-indicating reduced business confidence and investment appetite. Economists and policymakers have expressed concern over the stagnation, citing political instability, high loan interest rates, and tightening monetary conditions in recent months.By lowering the cost of borrowing from the central bank, Bangladesh Bank aims to empower commercial banks to offer loans at more affordable rates to businesses and consumers. This, in turn, could boost investment, trade, and consumption in a fragile economy.
However, economists warn that the expansionary policy could trigger inflationary pressures if not managed carefully. “Lowering rates increases credit demand and money supply, which may drive up prices if supply-side constraints remain,” said Dr. Ahsan H. Mansur, Governor of Bangladesh Bank.
Dr. Mansur has previously stated that a sustained reduction in inflation would pave the way for interest rate adjustments. With inflation easing to 8.48% in June-its lowest in nearly three years-and projected to fall below 7% by September, the central bank has acted preemptively to revive economic activities while keeping inflation expectations in check.
Meanwhile, inflation stood at 7.48% in July, continuing a four-month declining trend. Business communities and economists have been urging the central bank to adopt more flexible monetary policies to counteract the recent slowdown in investment and credit.
The policy shift mirrors trends in neighboring countries, including India, where central banks have also revised rates based on inflation data and business demands.
Stakeholders in the banking and business sectors have welcomed the move, viewing it as a timely measure to combat the ongoing credit crunch and support economic recovery. However, they caution that monetary easing must be accompanied by reforms in governance, infrastructure, and fiscal policy to ensure sustainable growth.
As Bangladesh prepares for its post-LDC transition and grapples with external tariff threats, an efficient flow of credit to the productive sectors will be key to maintaining export competitiveness and economic resilience.