The central bank expects inflation to drop to 6.07 per cent by June this year from 6.20 per cent in December 2015, the governor of Bangladesh Bank (BB) said. The central bank governor said this while announcing the half-yearly monetary policy (January-June 2016) on Thursday. According to the monetary policy statement (MPS), the 12-month average Consumer Price Index (CPI) inflation in the country has shown a gradual declining trend for the past couple of years. In July 2014, inflation was 7.28 per cent, which came down to 6.19 per cent in December 2015, showing further fall due to decreasing fuel and commodity prices. However, the main factor driving this fall in average inflation has been falling food inflation, while non-food inflation has been showing an upward trend. Food inflation dropped down to 6.05 per cent in December 2015 from 8.55 per cent in July 2014. On the other hand, non-food inflation rose from 5.41 per cent in July 2014 to 6.41 per cent in December 2015. In December 2015, core inflation, which excludes food and fuel components, rose to 6.79 per cent from 6.28 per cent in July 2014.
According to public perception, fuel price reduction has mainly affected general inflation, said the MPS.
However, this is not the case as the government has not adjusted the reduction to domestic prices yet, the MPS added. Although expectations owing to global fuel prices may have played a positive role in dampening inflationary concerns, food component that occupies nearly 60 per cent of the consumption basket has played a major role in bringing down general inflation.
However, two opposite tendencies may impact inflation - pay hike in the government sector may increase prices, while fuel price adjustment by the government, if executed as committed, is likely to pull down prices.
Bangladesh may remain less comprehensive about inflation right now when Europe, Japan and China weaken and a further decline in global oil prices is foreseen.
However, the recent upward trend in non-food inflation and core inflation makes the central bank circumspect on monetary growth, according to the MPS.
Considering conflicting signals from general inflation and core inflation, BB has decided to remain cautious while adopting a generously supportive stance for inclusive, sustainable output growth.
Following the growth-supportive stance, the apex bank has planned to increase broad money (M2) at the rate of 15 per cent. This stance of money supply will comply with the growth target and absorb moderate inflation, said the policy statement.