Cenbank to unveil new monetary policy tomorrow; no change to 10% policy rate likely

Highlights

• Bangladesh Bank expected to keep repo rate unchanged at 10% in FY2026-27 MPS tomorrow
• Policy to balance inflation control with support for private credit and investment
• Targeted liquidity support and spread cap under consideration
• Inflation above target while private credit growth slows amid weak sentiment

Bangladesh Bank is expected to keep the policy (repo) rate unchanged at 10% when it unveils its Monetary Policy Statement for the July-December period of FY2026-27 tomorrow (30 June), maintaining its tight monetary stance to curb inflation while rolling out targeted measures to support private sector credit and economic recovery.

The Monetary Policy Statement, the first under the newly formed BNP-led government, is expected to focus on boosting private sector lending through targeted liquidity support, encouraging productive investment and possibly reintroducing a cap on banks' interest rate spreads to lower borrowing costs.

The policy is also expected to outline a gradual increase in money supply directed towards productive sectors without jeopardising ongoing efforts to bring inflation under control.

Bangladesh Bank has pursued a contractionary monetary policy since the first half of FY2023-24, raising the repo rate in phases to 10% by October 2024 to curb inflation by tightening liquidity and restraining demand.

Although inflation has moderated from last year's double-digit levels, it remains stubbornly high. Point-to-point inflation stood at 9.42% in May, while the 12-month average remained above 8.6%, exceeding the central bank's 7% target.

Bankers said the central bank is unlikely to ease its restrictive monetary stance despite signs of moderation in inflation, as restoring price stability remains its primary objective.

Policymakers are also considering reinstating a 4% cap on the spread between banks' lending and deposit rates, a move aimed at improving the transmission of monetary policy and reducing financing costs for businesses.

The new Monetary Policy Statement comes at a time when Bangladesh is seeking to balance inflation control with the need to revive private investment. Private sector credit growth has slowed markedly in recent months amid elevated borrowing costs, weak business confidence and cautious lending by banks.

Fahmida Khatun, executive director of the Centre for Policy Dialogue (CPD) and a member of Bangladesh Bank's board of directors, said monetary policy alone has had limited success in achieving its objectives because inflation in Bangladesh has largely been driven by supply-side pressures.

"Supply chain disruptions, exchange rate depreciation, higher import costs and inefficiencies in domestic markets have all contributed significantly to inflation. Monetary policy alone cannot effectively address these challenges," she said.

She also noted that high interest rates are only one factor behind sluggish private sector credit growth.

"When businesses remain hesitant to invest because of a weak business environment, persistent energy shortages and policy uncertainty, simply adjusting interest rates is unlikely to generate the desired increase in private sector credit," Fahmida said.

The government is looking to accelerate economic activity in FY2026-27 after an extended period of subdued private investment.

Officials believe targeted refinance schemes and sector-specific stimulus measures, rather than broad-based monetary easing, could help channel liquidity into productive sectors while keeping inflationary pressures contained.