Bangladesh Bank (BB) has been formulating a contractionary monetary policy for several years to control high inflation. To achieve the goal, credit growth has been curbed and interest rates have been increased. This continuation of the contractionary monetary policy will continue in the current 2025-26 fiscal year (FY). The central bank’s Governor Dr. Ahsan H Mansur is expected to announce the new monetary policy through a press conference on July 31.

As part of the contractionary monetary policy, the monetary policy for FY 2024-25 had set a target of 9.8 percent for private sector credit growth. But due to the stagnation of investment, even this single-digit target was not achieved. From May 2024 to May 2025, private sector credit grew by only 7.17 percent in a year. In recent years, private sector credit growth has not seen such a decline.

High interest rates have become a major obstacle to credit growth in the private sector. Currently, the central bank’s policy interest rate or repo rate is 10 percent. However, this rate was fixed at 5 percent three years ago. Due to the impact of the double-digit repo rate, the interest rate on bank loans has now reached 15-16 percent. Entrepreneurs are unwilling to expand their businesses with such high-interest loans. This is why the private sector is stagnant, according to those concerned.

Officials of the Monetary Policy Department of Bangladesh Bank said that the work of formulating the monetary policy for FY 2025-26 is in the final stage. The draft of the monetary policy will be presented to the central bank’s board meeting on July 30. After approval there, the Governor will announce the monetary policy on July 31. In the new monetary policy, the target for credit growth in the private sector and the policy interest rate are likely to remain unchanged. The policy interest rate will remain at 10 percent until inflation falls below 7 percent. Accordingly, there is no possibility of reducing the policy interest rate in the next six months.

When asked about this, Bangladesh Bank Deputy Governor Dr. Md Habibur Rahman told Bonik Barta, “Inflation, which has been on the rise for three years, has now started to decline. This is the result of the central bank’s contractionary monetary policy. The monetary policy stance will remain unchanged so that inflation comes down further. There is little chance of much change in this regard.”

According to data provided by the Bangladesh Bureau of Statistics (BBS), the country’s average inflation has decreased for four consecutive months. Last June, the country’s overall inflation was 8.48 percent, which is the lowest in 35 months. Earlier, in July 2022, inflation was 7.48 percent. The average inflation rate in the 2024-25 fiscal year was 10.03 percent.

The interim government has announced a budget of BDT 7.9 trillion for the current fiscal year. In the announced budget, the GDP growth target has been set at 5.5 percent. And the inflation target has been set at 6.5 percent. A monetary policy is announced to help achieve the GDP growth and inflation targets. However, the declared target in monetary policy has remained elusive for several years.

Business owners have been demanding a rapid reduction in the policy interest rate as well as bank loan interest rates to revitalize the private sector. They have met the Finance Adviser and the central bank’s Governor several times with this demand. However, the government or the central bank has not heeded the traders’ demand so far. Rather, it has been said that there is no possibility of reducing the policy interest rate until the target of reducing inflation is achieved.

When asked about expectations in the new monetary policy, Mutual Trust Bank Managing Director Syed Mahbubur Rahman told Bonik Barta, “The Governor has already expressed his opinion on keeping the policy interest rate unchanged. Accordingly, we assume that there will be no significant change in the new monetary policy. The monetary policy will be formulated while continuing the contractionary trend. The central bank has decided to stop the 14-day repo. This may increase the liquidity crisis in the money market. Because there is not enough money in the interbank money market to transact in repo or call money.”

Syed Mahbubur Rahman believes that credit growth in the private sector will not increase unless there is political stability. He said, “There is no political stability in the country at the moment. The law and order situation is also not satisfactory. In this situation, domestic and foreign entrepreneurs are holding back from investing. The country’s electricity and energy situation is also not good. Bangladesh has not yet reached an agreement with the United States on tariffs. In such a situation, it is natural that credit growth in the private sector will not increase. Banks will not be able to provide loans even if the credit growth target in monetary policy is increased. Rather, if the overall situation stabilizes, investment and credit flow will increase.”