Bangladesh raises key policy rate to fight inflation

DHAKA: Bangladesh’s central bank raised its key interest rate by half a percentage point on Wednesday, its second hike this year as it battles stubbornly high inflation.

The central bank said it had raised the repo rate, which it uses to inject money into the banking system, by 50 basis points to 8.50%.

The move comes after the South Asian country’s annual inflation rose to 9.81% in March from 9.67% in February, with overall inflation remaining above 9% since March last year.

The government had said in October last year it wanted to bring inflation down to 8% by December.

High inflation has remained a headache for the government of Prime Minister Sheikh Hasina, who won a fourth successive term in the January election boycotted by the main opposition party.

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Sharply rising living costs sparked violent protests in the months before the election, as Hasina’s government struggled to pay for costly energy imports due to shrinking dollar reserves and a weakening domestic currency.

The central bank also introduced the crawling peg exchange system, setting a new price for the dollar at 117 taka from 110 taka, which saw the biggest devaluation in local currency against the dollar in a single day.

“The crawling peg system will be an interim arrangement before moving to a fully flexible market-based system in the near future,” the central bank said.

The central bank said the Bangladesh economy faced two critical challenges: persistently high inflation and depleting foreign exchange reserves.

“Although the central bank and the government have taken various measures to curb inflation, stabilize the exchange rate, and protect the erosion of foreign exchange reserves, inflation remains stubbornly high and the foreign exchange reserve situation is not improving to the desired level.”

The economy has slowed sharply since the Russia-Ukraine war pushed up prices of fuel and food imports, forcing Bangladesh to turn last year to the International Monetary Fund (IMF) for a $4.7-billion bailout.

The IMF has reached a staff-level agreement on the second review of Bangladesh’s extended credit facility, giving the country access to $1.15 billion in financing pending approval by its board, the global lender said on Wednesday.