The Bangladesh Bank is likely to abandon its SMART rate policy of determining lending rate and shift to market-based approach as per an International Monetary Fund鈥檚 proposal.
BB governor Abdur Rouf Talukder at a programme on Sunday said that interest rate determination would shift to a market-based system.
He mentioned that the six-month moving average interest rate of 182-day treasury bill (SMART) was an interim measure and that banks would have the freedom to set interest rates according to market demand.
Businesses feared that lending rate would jump abnormally if the central bank left the interest rate to the market, which eventually increase their business costs significantly.
The BB is yet to publish the SMART rate for May on its web site, as it had been regularly doing since July 2023.
Under the current system, the lending rate was increasing every month as the SMART rate was increasing.
According to BB officials, the six-month moving average interest rate (SMART) of 182-day treasury bill shot up to 11.13 per cent for May from 10.55 per cent for April and 9.61 per cent for March.
The central bank set the interest rate corridor margin to 3 per cent and allowed banks to add the margin with the six-month moving average interest rate.
Given the current SMART of 11.13 per cent, the highest limit for bank lending rate stands at 14.13 per cent for May, which was 13.55 per cent in April.
The lending rate margin will be 2 per cent instead of 2.5 per cent in case of loans for pre-shipment export and agriculture, it said.
The BB introduced SMART system to manage the unusual rise in lending rates.
The central bank is trying to stabilise the rising lending rate by lowering the margin as interest rate on loans has rapidly increased in recent months due to rising reference rate, SMART.
The interest rate increased after the central bank on January 17 raised the policy rate by 25 basis points to 8 per cent from 7.25 per cent in an effort to address mounting inflationary pressures in the country.
Criticisms from various quarters and recommendations by the International Monetary Fund prompted the central bank to take the step, BB officials said.
On June 18, 2023, the BB in its monetary policy statement adopted a new interest rate regime, removing the previously imposed 9 per cent lending rate ceiling.
Under the new framework, the lending rate for banks is determined by incorporating a 3-per cent corridor with six-month moving average interest rate of 182-day treasury bill (SMART).
The BB had imposed 9 per cent ceiling on lending rate in April 2020. However, the restriction was lifted on July 1, 2023.
Although the central bank stated that lending rates would be determined by market forces, the reference rate with a margin would restrict banks from lending beyond the interest rate margin.
