An overview of Monetary Policy

Bangladesh Bank has recently announced the Monetary Policy Statement (MPS) for the first half of the financial Year 2017-2018 with the aim of controlling the inflation and lowering the credit growth. Monetary policy is generally defined as the process by which the monetary authority (ideally central bank) of a country controls the supply of money, targeting a rate of interest for the purpose of promoting economic growth and stability. The official objective of the monetary policy is to maintain stable growth and low unemployment. Monetary policy is either expansionary or contractionary where the expansionary policy increases the total money supply in the economy more rapidly than usual. On the contrary contractionary policy shrinks the money supply than usual with the aim to control the inflation. In the MPS Bangladesh Bank said the half-yearly monetary policy, it is definitely possible to attain the 7.4 per cent GDP growth and 5.5 per cent inflation rate outlined in the 2017-18 budget with this monetary policy. What we have seen is that the private sector credit growth being lowering point 20 basis point from previous MPS. For January to June of 2017, the private sector credit growth ceiling had been set at 16.5 per cent. Private sector loans had increased 16.0 per cent as of May, according to Bangladesh Bank’s statistics. According to the new MPS, the ceiling for private sector credit growth now lowering at 16.3 per cent, which should be more to achieve GDP growth of 7.4 per cent. The government borrowing experiencing negative growth of -16.2 per cent for not borrowing from banking system. It has accumulated the requirement by selling of government savings certificates, where the government has to pay higher interest which will badly impact to the economy. Though there was ample scope to the government to borrow from the banking system with much less interest.

The current monetary policy emphasized on to control the inflation. It has given minimum attention on growth momentum. In the context of a lower middle income country and with the aspiration of to be a middle income country by 2021 we may not give much attention on inflation. Keep the inflation rate within 5.50 per cent is not the vital issue. According to the Bangladesh Bureau of Statistics, Inflation was 5.94 per cent on a point-to-point basis in June. Average inflation for the last fiscal year was 5.44 per  cent. Some economist strongly believe that this inflation will not create large impact in our economy. Rather we should follow the theory of famous American economist Milton Friedman’s “Helicopter Money”.

The basic principle of Helicopter Money is that if a central bank wants to raise output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and eventually go to the higher economic growth.

However, we expect that the monetary policy will keep pace according to the changing economic atmosphere of the country in the coming days.

 The writer is a banker and economic analyst

An overview of Monetary Policy

Bangladesh Bank has recently announced the Monetary Policy Statement (MPS) for the first half of the financial Year 2017-2018 with the aim of controlling the inflation and lowering the credit growth. Monetary policy is generally defined as the process by which the monetary authority (ideally central bank) of a country controls the supply of money, targeting a rate of interest for the purpose of promoting economic growth and stability. The official objective of the monetary policy is to maintain stable growth and low unemployment. Monetary policy is either expansionary or contractionary where the expansionary policy increases the total money supply in the economy more rapidly than usual. On the contrary contractionary policy shrinks the money supply than usual with the aim to control the inflation. In the MPS Bangladesh Bank said the half-yearly monetary policy, it is definitely possible to attain the 7.4 per cent GDP growth and 5.5 per cent inflation rate outlined in the 2017-18 budget with this monetary policy. What we have seen is that the private sector credit growth being lowering point 20 basis point from previous MPS. For January to June of 2017, the private sector credit growth ceiling had been set at 16.5 per cent. Private sector loans had increased 16.0 per cent as of May, according to Bangladesh Banks statistics. According to the new MPS, the ceiling for private sector credit growth now lowering at 16.3 per cent, which should be more to achieve GDP growth of 7.4 per cent. The government borrowing experiencing negative growth of -16.2 per cent for not borrowing from banking system. It has accumulated the requirement by selling of government savings certificates, where the government has to pay higher interest which will badly impact to the economy. Though there was ample scope to the government to borrow from the banking system with much less interest. The current monetary policy emphasized on to control the inflation. It has given minimum attention on growth momentum. In the context of a lower middle income country and with the aspiration of to be a middle income country by 2021 we may not give much attention on inflation. Keep the inflation rate within 5.50 per cent is not the vital issue. According to the Bangladesh Bureau of Statistics, Inflation was 5.94 per cent on a point-to-point basis in June. Average inflation for the last fiscal year was 5.44 per cent. Some economist strongly believe that this inflation will not create large impact in our economy. Rather we should follow the theory of famous American economist Milton Friedmans Helicopter Money. The basic principle of Helicopter Money is that if a central bank wants to raise output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and eventually go to the higher economic growth. However, we expect that the monetary policy will keep pace according to the changing economic atmosphere of the country in the coming days. The writer is a banker and economic analyst