The Bangladesh Bank on Sunday increased the policy rate by 50 basis points to 9 per cent with the aim of tightening money supply to control inflation.
The central bank made the decision following a meeting of the monetary policy committee of the regulator.
Apart from the repo rate, the highest ceiling on policy rate corridor of standing lending facility (SLF) rate has been increased by 50 basis points to 10.50 per cent while the lowest limit on standing deposit facility (SDF) rate has been raised to 7.5 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.
The inflation rate soared to 11.66 per cent in July and the rate has remained over 9 per cent since March 2023.
The rise in the policy rate means that the country鈥檚 commercial bank 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 in the financial market, thus mitigating 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聽7 in a day to Tk聽117 each. Gradually, it reached Tk聽120 per dollar on August 18.
The foreign exchange reserve, as per International Monetary Policy guidelines, depleted to $20.48 billion on August 22.
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 foreign exchange reserves over the year.