BB targets tight credit Half-yearly ==>> monetary policy will be announced tomorrow

Star (July 26, 2011)

The central bank may set a target to bring down private sector credit growth to 18 percent by June next year in a bid to reduce a huge pressure on exchange rate and contain soaring inflation.
The Bangladesh Bank may also target to lower domestic credit growth to 20 percent in its half yearly monetary policy for the current fiscal year to be announced tomorrow.
To reach the goal, the BB will aim at cutting money supply growth substantially by reining back the private sector credit flow.
A BB official said, to achieve the goal the central bank on the one hand may use policy instruments frequently and will also try not to intervene in the foreign exchange market.
It will also refrain from interfering if banks' credit and deposit rates soar.
In May this year, the domestic credit growth was 28.29 percent, while that in the private sector was 27.50 percent.
In the monetary policy of last fiscal year the BB set a target of bringing down domestic credit growth to 16 percent and the private sector credit growth to 15.2 percent.
To reach the goal the central bank used its policy instruments several times but failed to achieve the target.
In its monetary policy, the BB also plans to set a target of cutting down money supply to 16 percent, which was 21.88 percent in May this year.
The BB official said the ongoing high credit growth from domestic banking system created risks to price stability and external sector viability.
Credit from the domestic banking system continues rising sharply, both in the public and private sectors, with attendant steep decline in growth of net foreign assets, according to a BB report.
In the last fiscal year, the net foreign asset growth was only 0.2 percent which was 41.3 percent in the previous fiscal year.
The central bank also projected that in the current fiscal year there will be no growth rather there will be a deficit of 1.6 percent in foreign asset.
Last fiscal year, the BB sold $1 billion from its reserve, but the taka was devalued by around 7 percent against the US dollar.
The taka may depreciate another 4 percent in the current fiscal year, the BB said.
In the last fiscal year, the balance of payments (BOP) was under huge pressure. The BB estimated that in the last fiscal year the overall balance may have a deficit of $38 million, whereas it was $2.86 billion surplus in the previous fiscal year.
Vice Chairman of Policy Research Institute of Bangladesh Sadiq Ahmed said, in the current fiscal year the main challenge is to contain inflation and reduce pressure on the exchange rate.
The former WB official also said money supply must be reduced to ease the pressure. He said there may be a debate on how much that reduction should be, but it has to come down.
The central bank has various policy instruments to bring it down and it may use those, he said, adding that the commercial banks' lending and deposit rates have to be increased to achieve the money supply growth target.
The central bank will have to strictly monitor the banks so that their credit deposit ratio does not go up beyond the limit.
Former central bank governor Salehuddin Ahmed said the monetary policy alone cannot tackle the macro-economic challenges. There has to be a balance between the government's fiscal policy and trade policy.
The government's trade policy and fiscal policy will have to be well coordinated to strengthen the supply side, he said, adding that the BB should clearly depict this need in its monetary policy.
The monetary policy should be pragmatic, focusing not only on demand management but also on increasing investment in the real sector, said the former BB governor.