Introduction to Monetary Policy
Bangladesh Bank (BB) has announced its decision to maintain a tight monetary policy stance for the first half of the current fiscal year 2025-26. The primary aim of this policy is to contain inflation and anchor inflation expectations. According to BB Governor Dr. Ahsan H Mansur, if the inflation rate continues to decelerate, the policy repo rate may be adjusted downward. However, until then, the policy repo rate will remain unchanged at 10.0 percent, the Standing Lending Facility (SLF) rate will remain at 11.5 percent, and the Standing Deposit Facility (SDF) rate will be 8.0 percent.
Global Economic Outlook
The global economic growth is expected to weaken due to increased trade tensions and heightened policy uncertainty. The recent rise in tariffs by the U.S. administration and the associated uncertainties pose risks to exports, disruptions to global supply chains, and intensify financial market turbulence. However, global inflation is expected to ease due to weakening demand, currency volatility, and declining hydrocarbon prices. As a result, central banks around the world may be more inclined to reduce interest rates or keep them steady at current low levels.
Domestic Economic Challenges
The Bangladeshi economy was confronted with significant macroeconomic challenges when the current interim government assumed office in August 2024. The major challenges included persistently high inflation, a depreciating exchange rate, depleting foreign exchange reserves, a buildup of external payment arrears, tight liquidity conditions, a lack of good governance, and elevated non-performing loans (NPLs). In response, BB has outlined clear and forward-looking strategies emphasizing its strong commitment to containing inflation, stabilizing the exchange rate, rebuilding foreign exchange reserves, and restoring confidence in the banking sector through improved governance.
Monetary Policy Initiatives
To fulfill its commitment, BB has maintained a tight monetary policy stance and adopted a fully flexible market-based exchange rate regime. BB also initiated a wide range of reform programs targeting the banking sector. The headline inflation has gradually eased in response to the coordinated demand and supply-side measures adopted by the respective authorities. Exchange rate stability has been achieved due to a substantial improvement in the balance of payments, which contained the pass-through effect of imported inflation.
Exchange Rate Regime
BB moved towards a more flexible exchange rate regime in May 2025, aiming to enhance stability in the foreign exchange market. This flexible exchange rate regime remains crucial for achieving smoother adjustments to external imbalances, easing foreign exchange market pressures, and preserving foreign reserves. BB recognizes that allowing greater exchange rate flexibility is an important policy initiative to compensate for the impact of reduced demand of exports amid escalating trade tariffs. To closely monitor the foreign exchange market, BB publishes a reference exchange rate twice a day, which serves as a benchmark for price discovery in the market.
Addressing Non-Performing Loans
To address the rising non-performing loans (NPLs), BB has launched significant reform initiatives to avoid a crisis and ensure long-term economic stability. The effective implementation of ongoing initiatives, coupled with forthcoming measures and the development of robust resolutions for distressed banks, will position BB to restore good governance practices and bolster stakeholder confidence in the banking system. Additionally, BB will roll out the risk-based supervision (RBS) of banks starting from January 2026, aiming to usher in qualitative changes in how banks are monitored and regulated.
Conclusion
In conclusion, the tight monetary policy stance adopted by BB for the first half of the current fiscal year 2025-26 is expected to contain inflation and anchor inflation expectations. The flexible exchange rate regime and the reform initiatives launched by BB are expected to enhance stability in the foreign exchange market, rebuild foreign exchange reserves, and restore confidence in the banking sector. The effective implementation of these initiatives will position BB to achieve its policy objectives and ensure long-term economic stability.
