The Bangladesh Bank (BB) is grappling with an obstinate economic reality: inflation.
Despite an aggressive tightening cycle that has pushed the policy rate from 6 percent to 10 percent over the past three years, inflation refuses to be tamed.
Headline inflation, which peaked at 11.66 percent in July 2024, has defied the gravitational pull of higher borrowing costs. Although it dipped briefly to 8.48 percent in June last year, falling below 9 percent for the first time in two years, the relief was short-lived.
By December, inflation had edged back up to 8.49 percent from 8.29 percent the previous month.
The 12-month average now stands at 8.77 percent, well above the central bank’s target. This also challenges the optimism expressed by Governor Ahsan H Mansur, who had forecast inflation falling below 5 percent by fiscal year 2025-26.
The failure of tight money to cool prices reflects a basic policy contradiction.
BB has raised the repo rate, the cost at which commercial banks borrow from the central bank, making credit more expensive in theory. In practice, however, liquidity has continued to flow into the system.
To prevent the collapse of a dozen fragile lenders, the central bank has injected more than Tk 50,000 crore into the banking sector, extending a policy of regulatory forbearance that began under the previous regime. Another Tk 40,000 crore has entered the economy through the central bank’s purchases of US dollars from commercial banks.
“This simultaneous tightening and easing undermines policy credibility and limits its ability to curb inflation effectively,” said Birupaksha Paul, a professor at the State University of New York at Cortland and a former chief economist at the BB.
“This has created a counterproductive cycle,” he said.
Weak fiscal discipline has further blunted the impact of monetary policy. While private sector credit growth slowed to 7.2 percent in December, government borrowing surged by 26.28 percent year-on-year in November, smashing the central bank’s ceiling of 20.4 percent.
The contrast points to the state crowding out private enterprises, pushing up money supply even as businesses rein in borrowing.
Apart from the money supply mechanism, structural problems are also keeping prices elevated.
Inflation initially surged after external shocks in 2022, including the war in Ukraine, a dollar shortage, and a sharp depreciation of the local currency, Taka. Those pressures have since eased, but domestic governance failures continue to feed inflation.
Supply chains are distorted by “market syndicates” and extortion, which raise costs regardless of interest rates. These factors lie outside the scope of monetary policy but shape inflation expectations, Paul said. Households and businesses, fearing future shortages, have begun hoarding essential goods, turning fears of price hikes into a self-fulfilling prophecy.
Zahid Hussain, a former lead economist at the World Bank’s Dhaka office, said there is little room for policy easing. A rate cut at this stage would risk fuelling inflation rather than containing it, leaving the central bank likely to hold rates at 10 percent in the near term.
“Inflation is not being driven only by excess demand; supply-side bottlenecks and global supply chain disruptions are also playing a major role in keeping prices elevated,” Hussain added.
The economist said that while dollar purchases have boosted liquidity, weak private credit demand has so far prevented a sharper inflationary surge. But with supply constraints unresolved and the government’s thirst for credit still rising, monetary policy alone is failing to contain persistent price pressures.
