Operating the monetary policy

The Bangladesh Bank (BB) last Tuesday declared monetary policy for the second half of the current fiscal year. The policy aims at controlling inflation, bringing more of the population under banking services and increasing credit on the whole to the private sector, while facilitating chanelisation of funds to supporting production-oriented activities. The central bank will apparently face a big challenge in going after the targets it has set before it or scoring success simultaneously in all the areas. This is because in the present context of the economy, it would be required to tread a path very carefully, often changing tactics, to cater effectively to the goals that have been set and to achieve an integrated positive outcome from the same.

The BB certainly faces a tough situation in reining in the tendency towards higher inflation. The Consumer Price Index (CPI) increased to nearly 7.0 per cent on a point to point basis in October last from 4.60 per cent in September, according to available reports. The expert guesses are that the same must have only become higher since that time. Here again, the official estimates about non-food prices are considered to be much on the lower side than what the real situation is. The key task of a central bank, anywhere, is to tame the price pressures through a judicious exercise of its available monetary policy tools. In this context, the policy response has to be flexible and made to work at the ground-level, considering the hard realities. The investment activities, the remittance flows from abroad and uses of related funds, actual levels of domestic production, import and export operations etc., have all to be kept under a constant watch, from a dynamic perspective, for the choice of policy options and their proper blending. The choice here is in no way a straight one between a contractionery policy or an expansionary one, in application of "bookish" theories. The ground-level realities, particularly in the context of an economy like that of Bangladesh having its structural and other institutional rigidities, are far more complex than what simple theories may otherwise suggest.

Thus, the present condition of the Bangladesh economy confronts the policy planners with a tough choice of weighing carefully the practical relevance of monetary policy tools in relative terms to the real ground-level situation, while adopting the related policy stances. While some contraction in money supply may be dictated by a situation in which some disconcerting signals about price pressures are in clear sight, yet the monetary policy should not be focussed only on decreasing the money supply that may restrict the flow of funds to the private sector, inhibiting its expansion and putting fetters on new investment activities. The executors of the monetary policy in Bangladesh will, therefore, need to walk a delicate tightrope of contributing to both requirements without upsetting the apple cart. Furthermore, both lending and deposit rates should also clearly be aimed at encouraging savings, on one hand, and energising the economy through investment and expanded growth of the real sectors, on the other.

While announcing the six-monthly policy, the BB governor has stressed that credit resources would be routed mainly to productive sectors and not spent on sheer consumption. Indeed, this should be the priority area of choice for the central bank. The central bank has many tools at its disposal either to contract or expand money supply. But what is more important for it is to ensure -- though policy guidelines and other supportive measures and not certainly by its executive fiats, that banks and financial institutions are in a better position to pursue effectively the desired goals. These goals are clear: making funds available for facilitating expanded economic activities in productive sectors that will contribute to raising the aggregate national output of goods and services while creating more jobs for the unemployed. How well the BB would be scoring in this area could prove to be the main determinant of its success in implementing the declared monetary policy.

Source:thefinancialexpress-bd.com/