The central bank has decided to stick to the expansionary monetary policy during the second half (H2) of this fiscal year (FY) with some adjustments, taking into account the money market and the overall macroeconomic situation.
The decisions were taken at a meeting of the monetary policy committee (MPC) held at the Bangladesh Bank (BB) headquarters in Dhaka on Sunday with BB Governor Fazle Kabir in the chair.
"We'll continue with our expansionary monetary policy stance during the January-June period of FY, 2020-21, with some adjustments reflecting monetary and other macroeconomic developments," Md. Habibur Rahman, executive director (research) of the central bank, told the FE after the meeting.
Dr Rahman also said the central bank is set to bring such adjustments in its monetary programmes following the government's downward revision of the gross domestic product (GDP) growth.
The government has already cut its GDP growth projection at 7.40 per cent from its earlier projection of 8.20 per cent for the FY'21 mainly due to the ongoing Covid-19 pandemic.
According to the planned adjustments, the target of the country's aggregate money supply, measured by broad money (M2), is expected to decrease by 0.60 percentage point to around 15 per cent in June instead of 15.60 per cent earlier, according to officials.
M2 is a measure of the amount of money in an economy with the combination of highly-liquid and the less-liquid money.
The growth of M2 stood at 14.21 per cent in December 2020 against its target at 14 per cent, set by the BB earlier.
Besides, the target of reserve money (RM) is also set to slash in line with the growth of revised M2 to curb possible inflationary pressure on the economy, they added.
They also said targets of credit to the public sector particularly the government borrowing from the banking sector is likely to decline in H2 of FY'21 while the private sector credit growth is expected to remain unchanged.
Such revisions of the monetary programme for H2 of FY'21 will be announced formally on Monday through issuing a press statement.
The BB's latest moves came against the backdrop of rising trend in excess liquidity in the country's banking sector in recent months following lower private sector credit growth.
Banks' excess cash hit an all-time high of Tk 2.04 trillion in December last following lower private sector credit growth, caused by supply chain disruptions amid the ongoing coronavirus pandemic, according to bankers and experts.
The growth in credit flow to the private sector came down to 8.37 per cent in December 2020 on a year-on-year basis from 9.20 per cent in July last calendar year.
This growth was 3.13 percentage points lower than the BB's target of 11.50 per cent for the first half (H1) of the current fiscal year.
The central bank officials, however, said the private sector credit growth is expected to pick up in the coming months as the launch of coronavirus vaccination is set to contain the spread of deadly virus in the country, thus boosting the people's confidence in economic activities.
The BB is set to keep unchanged the private sector credit growth target at 14.80 per cent for H2 of FY'21.
The ongoing expansionary monetary policy coupled with the implementation of the government's stimulus packages have driven up liquidity in the banking system, they explained.
The government has so far announced a total of 23 stimulus packages worth Tk 1.24 trillion to offset the shock of Covid-19 pandemic in various sectors of the country.
The packages, equivalent to 4.44 per cent of the country's GDP, are being implemented under the supervision of the central bank and the ministry of finance.
"Fresh credit demand particularly from the private sector will help reduce the amount of excess liquidity in the banking sector," Mustafa K. Mujeri, executive director of the Institute for Inclusive Finance and Development (InM), told the FE while explaining the excess liquidity situation in the banking system.
Dr Mujeri, a former chief economist at the BB, also said the central bank is set to adjust its different indicators of the monetary programme in line with the government's revised GDP growth projection.
"It will be very challenging to achieve the private sector credit growth target when it is not expected to reach the double-digit growth even by March 2021," Syed Mahbubur Rahman, former chairman of the Association of Bankers, Bangladesh (ABB), told the FE while explaining the private sector credit growth situation.
Earlier on July 29, the central bank unveiled an expansionary monetary policy for FY'21 aiming to speed up recovery of the pandemic-hit economy.
As part of the expansionary policy stance, the BB slashed overnight repurchase agreement (repo) rate by 50 basis points to 4.75 per cent while cut reverse repo rate to 4.00 per cent from 4.75 per cent.
The central bank cut the policy rates to ensure the availability of cheaper funds for banks and greater flow of funds into the economy.
Besides, the bank rate has been re-fixed at 4.0 per cent from 5.0 per cent to rationalise it with the current interest rate regime.