Introduction to Inflation
Inflation has been a significant issue in the country for the past three years, causing the real income of fixed-income individuals to decrease as the value of money declines. The question on everyone’s mind is whether inflation will continue to rise in the new year. Despite a modest downward trend in the latter half of the previous year, inflation has not decreased substantially, providing little relief to the people.
Current Inflation Rate
According to official statistics, the annual average rate of inflation was 9.48% in December 2023, which increased to 10.34% by the end of 2024. The rate then decreased to 8.96% in November 2025. The inflation rate fell below 10% in July and remained below 8.50% until November last year. Although the December figure is not yet available, it is presumed that the rate will remain above 8%.
Monetary Policy
The Bangladesh Bank, in its half-yearly monetary policy statement for July-December 2025, aimed to reduce the inflation rate to 7% by the end of the year. To achieve this target, the central bank maintained a tight monetary stance. The statement announced in July last year said, "BB is likely to maintain its tight monetary policy in H1FY26 to contain inflation below 7.0%, while still supporting productive economic activities." However, it appears that monetary tightening does not entirely work, and the central bank may maintain the tight monetary stance in the upcoming period.
Understanding Monetary Tightening
Monetary tightening is a contractionary policy conducted by the central bank that raises interest rates to increase the cost of borrowing from banks and attract people to park money in banks. This process reduces the supply of money in the market, leading to a cut in aggregate demand and ultimately pulling down inflation. Inflation is the rate of increase in prices over a given period, and it is generally a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.
Macroeconomic Theory and Inflation
Macroeconomic theory links the money supply and inflation conversely, meaning a rise in money supply pushes inflation, and a decline in money supply reduces inflation. The central bank must contain the growth of the money supply to control inflation. By reducing the money supply or its growth, Bangladesh Bank has been trying to contain the inflationary pressure for the last two years. The money supply is usually measured by M2, or broad money, which includes currency outside banks, demand deposits, time deposits, and deposits with the central bank.
Money Supply and Policy Rate
At the end of FY23, the money supply stood at Tk 2.27 trillion, which was more than 10% of the amount in the same period of FY22. In FY24, the growth of the money supply moderated to 7.50%, reaching Tk 2.40 trillion. It increased to Tk 2.55 trillion in FY25, up 7%. The central bank has also kept the policy rate, repo rate to be precise, unchanged at 10% since the announcement of the H1MPS in July last. The growth of private credit is still modest, only 6.23% in October last year compared to the previous year, reflecting sluggish demand by businesses.
Role of Government in Controlling Inflation
Curbing excessive inflation is not the sole responsibility of the Bangladesh Bank, and the central bank cannot achieve the goal without support from the government. The central bank can adjust its tools to fight demand-pull inflation, but those tools are less effective against cost-push or supply-driven inflation. To contain cost-push inflation, measures like cutting taxes or relaxing imports to increase the supply of products are necessary. The finance ministry has the authority to cut or hike taxes, while import relaxation is the commerce ministry’s job.
Election-Centric Political Business Cycle
As Bangladesh is going to witness the 13th general election on February 12 this year, the economy has already entered the election-centric political business cycle. Whether inflation will stay at the current level or rise during the cycle is difficult to say. It is widely believed that inflation is unlikely to decline significantly before the election.
Conclusion
In conclusion, inflation remains a significant concern in the country, and the central bank’s efforts to control it have been partially successful. However, the bank cannot achieve its goal without support from the government. The upcoming election may also impact the inflation rate, making it challenging to predict the future trend. It is essential for the government and the central bank to work together to implement effective monetary and fiscal policies to control inflation and support economic growth.
