Bangladesh Bank has unveiled a monetary policy that seeks to achieve two objectives pulling in opposite directions: keeping monetary conditions tight enough to bring down inflation while making credit accessible enough to revive investment and economic growth.
That balancing act defines the central bank’s first Monetary Policy Statement (MPS) under Governor Md Mostaqur Rahman and has sparked debate over whether the contractionary monetary policy is becoming increasingly accommodative through targeted interventions.
The central bank on Tuesday kept the policy repo rate unchanged at 10 per cent for the third consecutive review, maintaining one of its most restrictive monetary stances in recent years. The Standing Lending Facility remains at 11.5 per cent, while the Standing Deposit Facility stays at 7.5 per cent.
The objective is clear. Bangladesh Bank wants to anchor inflation expectations and support the government’s targets of limiting inflation to 7.5 per cent while achieving 6.5 per cent GDP growth in FY27.
Yet the same policy package also expands targeted support for businesses through a Tk60,000 crore stimulus programme, easier access to foreign borrowing, a cap on lending-deposit interest spreads, and continued banking sector support, raising questions over how restrictive the overall policy remains.
The governor argued there is no contradiction.
“We want to bring vibrancy back to economic activities by restoring confidence in the private sector,” Mostaqur said while announcing the MPS.
According to the governor, inflation in Bangladesh is no longer driven solely by excess demand. Supply disruptions, structural market inefficiencies and geopolitical shocks have become equally important. In such circumstances, he argued, higher policy rates should restrain demand while subsidised, targeted financing should increase production, lower production costs and ease supply-side inflationary pressures.
The central bank has repeatedly acknowledged that monetary policy alone cannot solve inflation rooted in structural weaknesses.
That philosophy is reflected in the stimulus package announced earlier this year. Of the total amount, Tk41,000 crore will come from surplus liquidity within the banking system, while Tk19,000 crore will be provided through Bangladesh Bank’s refinance facilities. The package targets industries, agriculture, and cottage, micro, small and medium enterprises suffering from weak credit flows and high borrowing costs.
The policy also comes at a time when private sector credit remains unusually weak. Credit growth slowed to only 5.0 per cent in May as banks became increasingly cautious because of rising non-performing loans, fragile business confidence, and subdued investment demand. Bangladesh Bank expects private sector credit growth to recover gradually to 6.8 per cent by December.
The regulator has also intervened in the pricing of bank credit by capping lending-deposit interest spreads at four percentage points. The governor said some banks had widened spreads excessively after the transition to market-based interest rates by increasing lending rates much faster than deposit rates.
“We introduced the cap so that both depositors and borrowers can benefit,” he said.
Bangladesh Bank has simultaneously signalled a more liberal approach to foreign commercial borrowing. The governor said the central bank intends to simplify foreign borrowing because overseas financing has become significantly cheaper than domestic loans.
The policy follows the recent approval of Meghna Group’s $80 million loan from the International Finance Corporation after the proposal had initially been rejected over foreign currency repayment risks.
While Bangladesh Bank argues these measures complement rather than weaken monetary tightening, economists question whether the overall policy mix remains genuinely contractionary.
M Masrur Reaz, chairman of Policy Exchange Bangladesh, said the policy appears restrictive on paper but considerably less so in practice.
“The monetary policy stance is tight on paper, but it is not tight in reality because the central bank continues injecting money into the economy through various regular and irregular instruments,” he said.
He also criticised the cap on lending-deposit spreads, saying it runs against a market-based interest rate framework while subsidised lending and quasi-fiscal operations continue to support liquidity.
Md Ezazul Islam, director general of the Bangladesh Institute of Bank Management (BIBM), expressed similar concerns.
“The policy stance is not tight enough despite the higher policy rate because of growing cash feeding and liquidity support to commercial banks,” he said.
He pointed to reserve money, or high-powered money, as a key indicator. Reserve money growth accelerated to 14.39 per cent in April after recording negative 0.12 per cent growth in June last year. Yet the latest MPS projects reserve money growth of 7.5 per cent by December and 11 per cent by June next year, prompting questions over how quickly monetary expansion can be brought under control.
Bangladesh Bank insists the strategy is designed to prevent inflation from becoming entrenched without pushing the economy into a deeper slowdown. Whether that hybrid approach succeeds will be judged not by the policy statement itself, but by what happens over the next six months.
