The monetary tightening in Bangladesh, which has persisted for over two years, is finally showing signs of easing, with inflation starting to moderate and foreign exchange reserves improving.
Interest rates on treasury bills and bonds have dropped sharply, by up to 190 basis points in just one month, offering hope to businesses that relief from high borrowing costs may be on the horizon.
With the International Monetary Fund’s recent suggestion to keep the Bangladesh Bank’s policy rate at 10% until the end of 2025 to manage inflation, businesses and analysts are divided on whether an immediate rate cut is necessary.
Chartered Financial Analyst Shahidul Islam, managing director and CEO of VIPB Asset Management, believes the central bank should lower the policy rate to stimulate private sector credit growth, which has fallen to a 22-year low of 6.4%. “The current credit slowdown is stifling growth and job creation,” he added.
Dr Zahid Hussain, former lead economist at the World Bank’s Dhaka office, disagrees with an immediate rate cut. He emphasised that although inflation is decreasing—to 8.48% in June, it remains above the target of 5% for December, and reducing the rate too soon could undermine efforts to control inflation.
Dr Hussain noted that the central bank had injected liquidity into the banking system by purchasing around half a billion dollars from banks this month, which was a positive step for easing liquidity pressures.
However, he stressed that cutting rates immediately could jeopardise inflation control measures without boosting investment amid political uncertainties.
With private sector credit growth dropping significantly, concerns about the country’s growth prospects are mounting. Businesses are grappling with political uncertainty and high borrowing costs.
“The slowdown in investments and loan disbursement was primarily due to political uncertainties; borrowing costs are the second concern,” said Hussain.
He added that a policy rate cut, on top of the recent liquidity injection, may not immediately boost investments before political clarity is restored, suggesting that the central bank should hold off until December.
Entrepreneurs desperate for interest rate relief
Entrepreneurs, particularly those in the manufacturing and export sectors, are feeling the strain of rising interest rates.
Humayun Rashid, former president of the International Business Forum Bangladesh, shared that interest expenses surged by 50-60% over the past three years, exacerbating the pressures of falling sales, rising costs, and shrinking profit margins. “The shock has badly weakened firms,” Rashid said.
Echoing these sentiments, Shahidul Islam called for a “moderate” cut in the policy rate, arguing that inflation is on a strong declining trend and that a rate cut would not derail this process.
He emphasised that Bangladesh needs growth and job creation to support its economic recovery. “The policy rate should be immediately cut,” Islam added.
Are banks lowering rates?
Despite the recent decline in reverse repo and treasury rates, banks are exercising caution before reducing lending rates for existing clients.
Md Shaheen Iqbal, Deputy Managing Director and Head of Treasury at BRAC Bank, stated that banks are waiting for a more sustained decline in interest rates before cutting lending rates for existing clients.
However, strong banks like his have already started to cut deposit and lending rates by up to 100 basis points for new clients. “We anticipate a 50-basis-point cut in the policy rate in September-October, with another round by December,” said Shaheen Iqbal.
He also expects corporate borrowing rates, which were between 13-15% until July, to drop by 200 basis points by the end of the year.
However, without single-digit interest rates for industrial loans, businesses may struggle to meet the country’s aspirations for growth and job creation, according to Humayun Rashid.
Impact on large firms
For large firms like BSRM, the situation remains difficult. Shekhar Ranjan Kar, Head of Finance at the country’s leading steel firm, said that despite a 50-basis-point reduction in the reverse repo rate to 8%, there has been no relief for corporates on existing debt.
“Until July 2023, large firms like ours were paying 7-9% interest, but that surged to 13-15%,” Kar said.
This substantial increase in borrowing costs has been challenging for many companies, especially those reliant on debt for expansion. For example, ACI, a conglomerate with over $1 billion in annual revenue, now faces more than Tk 70 crore in additional interest payments each year due to a 100-basis-point rise in borrowing costs.
High interest expenses often eat away at profits, as evidenced by the recent annual reports of many firms listed on the Dhaka Stock Exchange.
Rashid said businesses, particularly those in manufacturing and exports, have had to navigate a range of challenges in recent years, including surging gas and electricity prices, rising costs, and shrinking profit margins.
He emphasised that the current economic environment presents an opportunity for relief. “The present environment is likely to open a breathing space for us,” he said, echoing BSRM’s Kar.
However, they both stressed that it is crucial for banks to pass the benefits of declining interest rates to borrowers quickly. Despite optimism surrounding potential interest rate relief, Zahid Hussain remains sceptical about a surge in industrial investments in 2025 due to ongoing political instability and uncertainty.