Though late, the Bangladesh Bank (BB) has felt the need for a flexible monetary policy aiming at meeting the sluggish investment demand in the economy. So long, the BB was very keen to tame inflationary pressure in the economy by imposing a tight cap on credit growth in the private sector. Although it contributed to success in containing inflation in the economy, it badly affected the private sector's investment demand. As the BB had been pursuing a somewhat contractionary monetary policy since July of 2010, the market rates of interest went up. As a result, the cost of borrowing in Bangladesh turned out to be one of the highest in the world.
While pursuing a monetary policy which was contractionary in practice, the growth of broad money (M2) or the money supply was squeezed, thereby pushing high the market interest rates of all types which, at the end, simply discouraged borrowing or investment in the economy. The BB was not ready to accept the argument that higher pressure of inflation could be neutralised by an increased supply of output which could have been there from more investment in business and industry.
The supply side of the economy is more important in an economy like ours where potential remains untapped in the absence of required capital investment. The monetary policy as a policy instrument contains inflation better in the fully employed economies of the West where extra potential for higher growth does not exist. But Bangladesh's case should be seen differently as here if more investment could have been made there would have been more output and at the end, fears of high inflation because of high investment would not have been simply there.
By advocating for a more flexible monetary policy or to some extent expansionary one, we never wanted to see runaway inflation in the economy. From an increased supply of money and, in turn, from more investment a slightly higher inflation rate might have been there, but that should be seen as an encouraging factor for investment and growth of the economy.
Economists could never agree as to what type of monetary policy is the best for a least developed country (LDC) like Bangladesh. But most of them agree that the monetary policy should not be seen from a rigid stand. Rather it should be seen how best it could help in propping up investment demand in the economy. Interest rates are the result of many cross-cutting factors, but none should deny that these rates are basically influenced as to whether to go up or down in the market place through the central bank's monetary policy.
The two important instruments used by any central bank in the world to give effect to varying interest rates in the market place are the rates of the Repo (Re-purchase agreement) and the reverse Repo. If these two rates are reduced, the market interest rates are expected to go down and the vice-versa. What were commercial banks in Bangladesh doing so long with their huge idle money? The idle money was used as an investment outlet in the BB's reverse Repo. The commercial banks, after failing to find suitable recipients of credit at the ongoing high interest rates, were using the idle funds in the purchase of the BB's reverse Repo and other short-term instruments.
We argued time and again that the BB should have taken an effective step in reducing the market interest rates by reducing the rates of Repo and reverse Repo. We understand that mere reduction of Repo rates will not necessarily lead to a fall in the market interest rates overnight, but lowering of those rates are crucial in giving the market a signal of lower interest rates in the coming days. By arguing for lower interest rates, we are not arguing for making money cheap. Rather we are arguing for making the cost of borrowing cheaper. If the Bangladesh economy grows at or beyond 7.0 per cent, the apprehension of high inflation rate will go away.
Also, Bangladesh should take advantage of cheap global raw materials, including 12-year low price of oil, for attaining a higher growth rate. The consideration of having more investment in the economy should have taken precedence over others.
When the BB Governor says that the Bank's monetary policy will be supportive to private sector's investment demand, we understand that he has taken into consideration the reasons for not having the required investment by the economy so long. About the recently-announced monetary policy, we have less of criticism and more of praise. The BB's zeal to help grow economic deepening is also laudable.
Any policy support that injects more money in the economy in the form of investment should be welcomed by everyone - and we do too. A lower interest rate will also help the ailing stock market which is suffering from a sluggish demand during the last few months. The policy which drives the investors for borrowing abroad at a low cost was never a wise one. Rather the wise one will be keeping them at home by lowering or offering competitive interest rates here in the Bangladesh market.
The writer is Professor of Economics, University of Dhaka.
