The Bangladesh Bank announced its' monetary policy for the second-half of 2023 (July to December) on 18 June 2023. The primary objective of this policy statement is to contain inflation. To achieve this goal, the central bank has raised interest rates including policy rate and repo rate as well as lifted the cap of lending rate to tighten credit growth and money supply. The Bangladesh Bank expects that by raising borrowing costs and restricting credit availability, it will be able to reduce excess demand and stabilize the price level. While this is a widely used approach prescribed by the International Monetary Fund (IMF), it may not be appropriate everywhere and in all circumstances. The nature and causes of inflation can vary country-to-country and thus different approaches and strategies may be required based on the circumstances.

The current inflation in Bangladesh is largely driven by supply-side factors including external shocks and disruption of supply and price hikes. Merely tightening the monetary policy may not effectively address the root causes but could impede economic growth and job creation, particularly in credit-dependent sectors such as agriculture, manufacturing, small and medium-sized industry, real estate, and business. The question arises as to what extent the current policy will be able to control inflation effectively or whether it will be counterproductive?

As we know, inflation can be induced by an excess demand for goods and services as a result of excess money supply, which is known as demand-pull inflation, and/or by an increase in the cost of production as a result of rising input costs, which is known as cost-push inflation. External causes such as global supply shocks - severe interruptions to essential commodities - also frequently trigger inflation. For instance, global inflation during the 1970s was primarily triggered by the oil crises that emerged in 1973 when the Organization of Arab Petroleum Exporting Countries (OAPEC) enforced an oil embargo on nations that supported Israel in the Arab-Israel War. This embargo resulted in a significant surge in oil prices and caused high inflation in many countries in the world.

It is important to note that Bangladesh's economy is heavily reliant on imports. The current inflation in the country is primarily driven by various factors that disrupted the timely supply of commodities, leading to shortages of supply of several essential commodities. The Russia-Ukraine war, global supply disruptions, increased fuel and energy prices, US dollar appreciation, higher transportation costs, and temporary bans on export of certain commodities by certain countries, all directly or indirectly contributed to increased commodity prices in Bangladesh. The rise in the prices of oil, gas, foods, and fertilizers, as well as increasing transportation costs, has resulted in import-driven cost-push inflation in Bangladesh. The higher commodity prices along with the increased interest rate in major trading partners including the USA have further affected the exchange rate of the Bangladeshi Taka, which significantly weakened the value of Taka and further increased the cost of imported goods.

Bangladesh's inflation is further fueled by unscrupulous business practices, such as making an excessive profit through unfair means and manipulating prices - not because of excess demand rather by manipulating the market and creating an artificial crisis. Even though the present inflation in Bangladesh is primarily due to supply shortages and profiteering, the Bangladesh Bank is trying to combat inflation by reducing aggregate demand, which may shrink the economy and lead to more unemployment and place additional pressure on consumers.

Bangladesh's economic condition is still in a precarious situation; grappling with several challenges including high unemployment, high poverty, limited private investment, slow business growth, and low entrepreneurship. The industries and businesses are already grappling with the mounting pressure of high energy and input costs and the irregular supply of different utilities. The increase in borrowing costs may further undermine their competitiveness, putting some businesses at risk of survival.

High-interest rates make borrowing more expensive and less attractive, discouraging consumption and investment, which in turn leads to slower economic growth and increased unemployment. Private investment is a crucial driver for job creation, innovation, and productivity increase. In Bangladesh, private sector credit growth has already slowed to 11.10 percent in May 2023, compared to 12.94 percent in May 2022. In contrast, private sector credit growth in India stands at 14 percent. While there is an increasing need for higher private-sector investment to generate employment, a slowdown in private-sector credit growth could affect the economy and society adversely.

It is important to note that no single policy will be enough to control inflation effectively in developing countries like Bangladesh. Containing inflation will require efforts in increasing domestic production, attracting foreign investment, improving performance of banking sector, as well as to minimizing non-performing loans, and controlling capital flight. Monetary policy is just one tool for managing inflation. One of the most significant strategies for controlling import-driven inflation is to increase the country's production and supply to the extent possible with a view to reducing pressure on foreign currency and exchange rate and providing a buffer against external price shocks.

To achieve macroeconomic goals, monetary and fiscal policies need to be well-coordinated and well-synchronized. The Government has taken an expansionary fiscal policy, a budget with a large deficit in order to support economic growth and stimulate the aggregate demand. To implement this budget, the Government will need to borrow from the banking system and other domestic sources. Monetary policy should help the government in achieving this fiscal goal by ensuring sufficient financing and low borrowing costs while maintaining price stability. However, by tightening the monetary policy, Bangladesh Bank may create a crowding-out effect that could increase the government's debt servicing burden and reduce the fiscal space for development spending.

As a regulatory body, Bangladesh Bank is responsible for monitoring and supervising the loan portfolios of all scheduled banks. There is a huge non-performing loan (NPL)in Bangladesh, which already destabilizes the entire banking sector and threatens the stability of the financial sector. There should be a clear roadmap in the monetary policy as to how to control non-performing loans. Without controlling NPL, increasing lending rates means shifting the banking sector inefficiencies to the genuine investors and discouraging investment. Similarly, capital flight is another issue that threatens Bangladesh's macroeconomic stability. So far, there is no serious effort visible in the monetary policy to curb capital flight as well as attract Foreign Direct Investment (FDI), both of which will be critical for managing the exchange rate as well as controlling inflation. These two issues demand more serious attention in the monetary policy of Bangladesh.

To conclude, Bangladesh needs a more prudent and accommodative monetary policy that would balance the inflation and growth objectives, and complement the fiscal policy efforts of the Government. Beyond the conventional contractionary and restrictive policies, the Bangladesh Bank could pursue a multi-faceted approach by focusing on reducing inflation while facilitating investment in increasing domestic production, and lowering import demand, as well as taking effective measures to control capital flight and attracting foreign investment.

Golam Rasul is a Professor at the Department of Economics, International University of Business Agriculture and Technology (IUBAT) in Dhaka, Bangladesh. The views expressed in this paper are those of the author's.

Golam Rasul, PhD, Professor, Department of Economics, International University of Business Agriculture and Technology, Dhaka, Bangladesh.