What does the US rate increase mean for Bangladesh?

The Federal Reserve yesterday (16 September) raised interest rates by 0.25 percentage points from 3.50-3.75% to 3.75-4.00% as inflation has become a concern. With this rate hike, the Fed aims to reduce borrowing and spending, cool demand, and bring inflation under control.

Inflation in the USA remains above the Federal Reserve's 2% target. As of July 2026, inflation was 3.7%. Higher energy prices, import tariffs, and strong investment and demand have continued to push prices higher.

With higher interest rates, loans are expected to become more expensive for households and businesses. This generally discourages consumption and investment and gradually eases price pressures.

Although the Fed raised US interest rates, its impact extends to the global economy through multiple channels. Higher rates make dollar-denominated investments more appealing, which encourages international investors to shift funds to the USA. This increases demand for dollars and strengthens the dollar, while currencies in developing countries come under downward pressure.

For governments and companies, borrowing dollars also becomes more expensive. Developing countries that seek new international financing may have to accept higher interest rates. Their repayment conditions could also become more difficult. Countries with large external debts, limited foreign-exchange reserves, or high levels of short-term borrowing are more likely to face increased pressure.

Global commodity markets may have an indirect impact. If rising US interest rates curb worldwide economic growth, demand for oil and other commodities could fall, lowering prices. This might benefit import-dependent countries like Bangladesh.

However, this relief remains uncertain because geopolitical tensions, conflicts, and supply disruptions can still affect global energy prices.

Besides, a stronger US dollar might offset some declines in international commodity prices. Since Bangladesh pays for most imports in dollars, a weaker taka could limit the benefits of moderate drops in oil, gas, fertiliser, or food prices for Bangladeshi consumers and businesses. The overall impact will hinge on changes in global commodity prices and the USD/BDT exchange rate.

In Bangladesh, a key issue is the increased pressure on the Bangladeshi Taka (BDT). A stronger dollar would raise the local cost of imported fuel, food, fertiliser, machinery, and industrial raw materials.

This could lead to higher inflation, increased production costs, and reduced household purchasing power. Businesses that rely heavily on imported inputs may face profitability challenges and may pass some of these costs on to consumers.

In such situations, Bangladesh Bank may feel compelled to sell dollars from its foreign-exchange reserves to curb excessive exchange-rate volatility. Some intervention may be necessary to prevent disorderly swings and sudden market instability.

However, consistently drawing on reserves to keep the exchange rate artificially stable is unsustainable. The BDT should be allowed to adjust gradually and transparently in line with market conditions. A credible exchange-rate system helps reduce uncertainty for importers, exporters, foreign investors, and remittance senders.

Bangladesh's external debt costs could rise as USD interest rates increase. Government agencies and private companies with variable-rate or dollar-denominated loans could face higher interest payments. Additionally, if the taka depreciates, repayment costs will rise further, as borrowers will need more taka to buy each dollar.

New foreign borrowing for infrastructure, power, energy, and private investment could become more expensive. Therefore, projects should be selected carefully. Foreign loans should be directed to economically viable projects that can generate sufficient economic returns or foreign exchange earnings. Projects with poor financial prospects could strain the budget and external debt repayment obligations.

The USA is the biggest market for Bangladesh's ready-made garments (RMG). If high interest rates curb US consumer spending, demand for clothing and other non-essential products might decline. Bangladeshi exporters could see fewer orders, face increased pressure from buyers to lower prices, and experience thinner profit margins. Smaller factories, with less ability to absorb rising financing, energy, and input costs, may be especially at risk.

However, a quarter-percentage-point hike alone probably would not lead to a sharp drop in garment demand. The overall effect will depend on factors like the US labour market strength, consumer confidence, inflation, and economic growth.

Bangladesh's competitiveness will also be affected by exchange-rate changes in countries such as Vietnam, India, China, and Pakistan. If their currencies depreciate faster than the taka, Bangladeshi exporters may face increased competition.

As a remittance-receiving country, Bangladesh may also feel the impact. However, the impact on remittances could be mixed. A stronger dollar boosts the taka value of remittances for Bangladeshi families, supporting household spending.

Still, formal remittance inflows will remain robust only if banks offer competitive exchange rates and the gap between formal and informal rates stays narrow. The government must encourage migrant workers to use official channels through transparent, market-driven exchange rates, faster transfer services, and lower costs.

As far as investment is concerned, higher returns on safer US assets might make foreign investors more cautious about Bangladesh, though significant portfolio outflows are unlikely. Investment decisions are strongly influenced by challenges such as energy shortages, regulatory uncertainty, exchange-rate risk, and difficulties repatriating profits.

These internal limitations may matter more than short-term portfolio shifts. Therefore, Bangladesh must strengthen its domestic investment environment, which is particularly crucial now.

Bangladesh Bank decreased policy rates on 30 July 2026 by 50 basis points, from 10% to 9.5%. This move aimed to bolster economic growth, promote private investment, and enhance credit flow following a lengthy period of restrictive monetary policy.

It also reflected concern over sluggish economic activity and subdued private-sector credit growth. Currently, Bangladesh Bank's room to lower domestic interest rates further is limited, given that inflation remains high.

While affordable credit is essential to support investment and employment, hastily lowering rates could weaken the taka, increase dollar demand, and fuel inflation. Therefore, Bangladesh's domestic policy should balance controlling inflation, maintaining exchange-rate stability, safeguarding financial sector health, and ensuring access to productive credit.

Overall, the consequences of the Fed's interest rate hike will depend more on the future path of US rates than on this single increase. Bangladesh should maintain a flexible, stable exchange rate, safeguard reserves, promote remittances through formal channels, restrict costly foreign borrowing, and monitor companies' foreign-currency risk.

At the same time, stronger fiscal discipline, better debt management, and improved banking governance are essential. In the medium term, Bangladesh needs to diversify exports and markets, enhance energy security, boost productivity, and increase investor confidence. These actions would help the economy withstand higher US interest rates and future external shocks.

Fahmida Khatun is a distinguished fellow at the Centre for Policy Dialogue (CPD).