The Bangladesh Bank on Tuesday increased the policy rate by 50 basis points to 10 per cent with the aim of tightening money supply to control inflation.
The central bank issued a circular in this regard on the day, effective from October 27.
The BB has begun to hike policy rate sharply since May 2022 when it was at 5 per cent. It raised the policy rate for the fifth time in the current year.
On September 24, the central bank increased the policy rate to 9.5 per cent from 9 per cent.
Apart from the repo rate, the highest ceiling on policy rate corridor of standing lending facility rate has been increased by 50 basis points to 11.5 per cent while the lowest limit on standing deposit facility rate has been raised to 8.5 per cent.
The special repo rate was renamed as the SLF and the reverse repo renamed as the SDF.
The central has decided to raise the rate amid persistent inflationary pressures in the country.
Although inflation eased slightly to 9.92 per cent in September from a peak of 10.43 in August, it still remained high.
The inflation rate has remained above 9 per cent since March 2023.
Fixed- and low-income households, in particular, have been struggling to meet basic needs as commodity prices continued to rise.
The rise in the policy rate means that the country鈥檚 commercial banks will have to pay more interest if they borrow money from the Bangladesh Bank.
The policy rate or repo hike is expected to raise banks鈥� lending rates, which in turn would reduce the demand for loans and fund flow to the financial market, and thus it would mitigate inflationary pressures.
On May 8, the central bank introduced a crawling peg system for the currency to address the depreciation of the Bangladesh currency taka against the US dollar and its impact on domestic inflation.
This system aims to regulate abnormal fluctuations in the taka鈥檚 value, paving the way for a fully flexible exchange rate regime in the future.
After the introduction of the system, the local currency taka depreciated against the US dollar by Tk 7 in a day to Tk 117 each. Gradually, it has reached Tk 120 a dollar.
The foreign exchange reserve, as per International Monetary Policy guidelines, depleted to $19.93 billion on October 16 from $46 billion in December 2021.
Since mid-2022, the Bangladesh taka has been depreciating against the US dollar, which contributed to domestic inflation, as the cost of imports has risen.
The taka has been weakening due to a balance of payments deficit leading to a significant reduction in the foreign exchange reserve over the years.