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Inflation, rates in Bangladesh to come down gradually, new cenbank chief says

Reforms likely in country's banking sector soon

Inflation in Bangladesh should come down substantially over the next year but bringing down interest rates could take longer, the country’s new central bank chief told Reuters, as the South Asian nation grapples with short-term macroeconomic challenges.

A widely respected former economist at the International Monetary Fund, Ahsan H. Mansur was named governor of Bangladesh Bank last week by the interim government headed by Nobel laureate Muhammad Yunus.

The rejig at the country’s institutions, including the central bank and the judiciary, was necessitated after former Prime Minister Sheikh Hasina fled to India earlier this month following an uprising against her government that killed about 300 people.

Mansur said macroeconomic challenges have built up in Bangladesh over the last two to three years due to mismanagement of the exchange rate and interest rate policy by the previous central bank administration.

“Putting back the Humpty Dumpty (together) is always difficult, so we are trying to put it back now,” Mansur said.

“With support from interest rate policy, we should be able to bring down inflation but it will take time. It’s not going to happen in the next 2-3 months, perhaps in about 5-6-7 months inflation should come down significantly but time has to be given for the interest rate to come down.”

Supply side measures

Inflation reached 11.66 per cent in July from 9.72 per cent the previous month, according to official data. The central bank’s key policy rate has been set at 8.5 per cent for the first half of fiscal year 2025.

To lower inflation, the central bank would need to rein in demand by keeping rates high, while the government was also working on supply side measures such as bringing in additional agricultural supplies, Mansur said.

Bangladesh Bank has also decided to widen the inter-bank currency trading band to 2.5 per cent from 1 per cent previously from Sunday, he said.

“So they (banks) will have more elbow room to play in that and they are hopeful that will increase the flow of foreign exchange into the inter-bank market. Inter-bank market has dried up, nobody was selling to anybody, everybody was holding on to their own dollars,” Mansur said.

The new interim government has got the green light from all multilateral agencies including the IMF and Asian Development Bank for their planned reforms, he said.

“In terms of governance, in terms of reforms, they are very much optimistic and we will have constructive discussions to broaden our engagement with them. We will seek technical support as well as financial support for carrying this forward.”

Separately, Mansur said the central bank would study and look to bring in some reforms in the banking industry amid concerns about corporate ownership of banks and cross-lending and defaults by some of these entities.