The money multiplier in Bangladesh reached a new high of 5.47, indicating that the taka is generating more money than before.
The money multiplier represents the potential maximum amount of money that can be created in the banking system from an initial deposit.
According to Bangladesh Bank data, the money multiplier climbed to 5.47 at the end of May, up from 5.07 at the end of June 2023 and 5.23 in May 2023.
This means that every one taka of the central bank鈥檚 money in Bangladesh will generate approximately Tk 5.47 worth of money supply in the economy.
For instance, with a money multiplier of 5.47, an injection of Tk 1,000 by the central bank could potentially result in Tk 5,470 in total money supply.
Financial experts said that while a higher money supply could stimulate economic activity, it could also lead to higher inflation if it outpaced economic growth.
Conversely, a lower money supply can help contain inflation.
The Bangladesh Bank report attributed the increase in the money multiplier to a decrease in the reserve deposit ratio and a fall in the currency deposit ratio.
The money multiplier is defined as the M2 money supply divided by the base money supply or reserve money.
This ratio is crucial in macroeconomics because it determines the amount of money in circulation, which influences interest rates and overall economic stability.
In banking, the money multiplier impacts monetary policy and the stability of the banking sector.
The money multiplier reflects the combined impact of the reserve requirement, banking practices, and public behaviour regarding holding cash versus deposits.
Central banks use the money multiplier to understand how changes in the monetary base affect the broader money supply.
Typically, the money multiplier is higher in advanced economies where people are more inclined to hold money in bank deposits rather than cash, unlike in Bangladesh where cash holdings are more common.
The growth pace of the money multiplier has been accelerating as banks are not keeping as much money with the central bank, preferring instead to extend more loans.
