Every inflationary lever is being pulled at once 

The government has cut interest rates. High-powered money supply has increased, the government is injecting liquidity while citizens are also holding more cash in hand. 

Floods have pushed up commodity prices. In other words, some of these inflationary triggers are the direct result of government policy, some stem from declining confidence in banking, and some have occurred naturally.

In May 2026, inflation hit a 16-month high of 9.42%, easing slightly to 9.16% in June. Right now, flood-related effects mean July inflation is likely to rise again. The government's budget inflation target is 7.5%.

In the middle of all this, the government has cut the policy rate (repo rate) by 0.5 percentage points, from 10% to 9.5%. The Standard Lending Facility (SLF), the ceiling of the interest rate corridor, has also been cut by 0.5 percentage points, from 11.5% to 11%, or 50 basis points in banking terms.

In other words, the government wants to increase the money supply. Cutting the ceiling rate and the policy rate will expand the money supply, but that comes with an inflation link.

In practice, though, the Standard Lending Facility (SLF), the average ceiling lending rate, stands at 11.96%. 

Meanwhile, without doing any monetary policy modelling, the government set a spread target of 4% on a single day's notice. In reality, the spread is 5.72%. This is calculated using the existing rates across all classified loan categories, but in practice the return on many loans is close to zero or negligible, while interest on some lending products, including SME loans, is much higher.

Setting spread targets by sector and by product (SME, corporate, personal loans, etc.) would be far more implementable; an overall, blanket spread target simply is not working.

The question is: the extra loan demand that a rate cut will create, where will that money come from?

Another notable development: cash-holding is rising. This too counts as reserve money.

Cash-holding is increasing because of a lack of confidence in banks. Cash in hand has grown, or deposits have fallen, by roughly Tk49,000 crore. And because cash counts as reserve money, through the money-multiplier effect, this is inflation-friendly.

At the same time, the government itself has increased its own borrowing from the banking system, and is supplying more liquidity to weak banks. On one hand deposits are falling, yet all these money-supply-boosting measures amount, in effect, to a full-scale effort to expand broad money. And broad money growth has a direct relationship with inflation.

Alongside this, the government is providing Tk60,000 crore to revive closed and sick industries, of which Tk19,000 crore-Tk20,000 crore is coming from the central bank's reserve money. This is high-powered money, and once it is money-multiplied into broad money it will amount to at least Tk1 lakh crore (the government's own money-multiplier estimate is 5.2).

In other words, even this one addition of Tk1 lakh crore will raise the money supply and push up inflation.

Cash-holding is increasing because of a lack of confidence in banks. Cash in hand has grown, or deposits have fallen, by roughly Tk49,000 crore. And because cash counts as reserve money, through the money-multiplier effect, this is inflation-friendly. At the same time, the government itself has increased its own borrowing from the banking system, and is supplying more liquidity to weak banks.

The Prime Minister said just today that this Tk20,000 crore will be disbursed by December. We had hoped that this kind of stimulus would come from budget financing rather than from reserve money, which would have meant a smaller contribution to inflation.

In January-June of the just-concluded FY2026, reserve money grew 12.1% (against a projection of 8%); in the first half it was 9.2% (versus a 5% projection), driven by Bangladesh Bank's record net purchase of $6.43 billion to build reserves, the unsterilised portion of which expanded the money supply.

Reserve money has overshot its projection by four percentage points over just the last six months. That matters.

In the last six months, broad money grew 10.8%. With reserve money rising further, and with the repo rate, policy rate and the ceiling lending rate all being cut, broad money growth could increase substantially. None of this is a policy conducive to bringing inflation down.

Another point: last time, cutting the deposit rate did not produce results. The policy should have been revised. Your real crisis is a lack of confidence in deposits and rising cash-holding. You should have raised deposit rates a bit instead.

You could have raised the Standard Deposit Facility (SDF), the deposit-rate floor, by 50 basis points, or 0.5 percentage points, this time.

Against the government-set 4% cap, the average spread stands at 5.72%; 56 of 61 banks are above the limit.

Adjusted for inflation, the real deposit rate is negative, at -2.8%, meaning that keeping money in a bank means losing purchasing power, which is damaging to savings incentives and to long-term deposit growth.

If money kept in the bank keeps shrinking in real terms every year, how do you plan to bring that closer to zero and restore confidence in deposits?

Monetary policy, after all, is a science. How exactly does the government plan to bring inflation down to 7.5%? Or is this budget target just a number on paper?

Unless the policy rate (repo rate), SLF, SDF and spread are each grounded in proper modelling, we can only conclude that the 7.5% inflation target is a token gesture.

You do not believe it yourself; your real goal is to expand the money supply in the market, which will only stoke inflation further.

It may be that businesses are constantly pressuring you for lower interest rates. Monetary policy under the Awami League era was a chronicle of repeated failure. Capping interest rates at 6-9% enabled cheap loans and massive capital flight. Why would an elected government walk down that same historically discredited path?

The one fair point here is that, since the economy is sluggish, cutting interest rates to boost business lending could create jobs.

But the real obstacle here is government borrowing.

Private-sector credit growth fell from 6.5% in June 2025 to 4.72% in March 2026, the lowest since independence, and stood at an estimated 5.5% in June 2026 (against an 8.5% projection).

By contrast, public-sector credit growth has been abnormally high: 28.9% in December 2025 and 25.9% in June 2026 (against a 21.6% projection).

In other words, it is not the policy rate or the SLF that has choked off private lending; it is public borrowing. So the policy response needs to be aimed at the right target.

Yes, cutting rates and expanding the money supply could boost jobs and industrialisation, but lending into the wrong hands could just as easily fuel more capital flight.

Bangladesh Bank's own model projects inflation at 8.6% in June 2027 (and this forecast will likely rise further given the rate cuts), even as the announced ceiling remains 7.5%.

A target the central bank itself does not believe in cannot function as a credible expectation anchor. Instead, this pattern of missed targets risks becoming institutionalised, further eroding credibility with international institutions.

Fitch and S&P have already downgraded the country's international credit rating.

Faiz Ahmad Taiyeb is a former special assistant to the Chief Adviser of the Interim Government.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.