A New Approach to Dollar Pricing Emerges: Unveiling the Upcoming Monetary Policy and Remaining Changes

 

Bangladesh Bank is set to take proactive measures to curb high inflation by considering a further increase in loan interest rates. Additionally, there are reports suggesting the introduction of the 'crawling peg' method to determine the dollar's price. The central bank is expected to unveil its new monetary policy for the January-June period today, with Governor Abdur Rauf Talukder scheduled to make the announcement at 3 pm. The financial sector in the country faces several challenges, including a local currency crisis, foreign exchange imbalances, and banking sector deregulation. The central bank holds the responsibility for addressing these issues, but concerns have been raised about its ability to fully supervise the banking sector, given external pressures. Controlling inflation is a key function of the central bank, which aimed to reduce inflation to 8 percent by last December and further to 6 percent by next June. However, as of the end of December, overall inflation stood at 9.41 percent, with overall food inflation at 9.58 percent. To combat inflation, Bangladesh Bank has implemented market-based loan interest rates and increased overall interest rates. The loan interest rate has surged from 9 percent to 11.89 percent. Despite these efforts, credit flow to the private sector has dwindled due to liquidity shortages and high interest rates, with private sector credit growth registering 9.90 percent in November, slightly below the targeted 10.9 percent by December. It has been reported that Bangladesh Bank is considering a further increase in the policy interest rate to prevent inflation, with the goal of reducing inflation to 6 percent by next June.

The country has been grappling with a dollar crisis for the past one and a half years, causing the official price of the dollar to surge from 86 taka to 110 taka. However, the market is witnessing trades surpassing 120 rupees. Consequently, both the current account and financial account are now in a deficit. In August 2021, Bangladesh Bank's reserve stood at 48 billion dollars, but the dollar crisis has led to a reduction of more than half in foreign exchange reserves. According to International Monetary Fund (IMF) calculations, the reserves currently amount to 20.38 billion dollars. However, the actual or net reserves are less than $16 billion. In response to the crisis, the central bank is gearing up to introduce a new method known as the 'crawling peg' to prevent further instability in the dollar price. This method involves adjusting the exchange rate of foreign currency with the rupee, allowing the currency rate to fluctuate within a specified range. By setting maximum and minimum limits for the currency rate, this approach prevents abrupt increases or decreases. Notably, some countries, including Vietnam, Argentina, Uruguay, and Costa Rica, have successfully employed this method to manage their currency situations.