Monetary Policy of BD

7/26/2019 Monetary Policy of BD

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Impacts&Imp

lications

This article is the partial fulllment of the course Macroeconomics

Submitted by,

MD Rifat ZahirBBA 2ndBatch

ID: 2014201004

Faculty of Business Administration

Coxs Bazar International Universit

Submitted to,

S M Rakibul AnwarLecturer

Faculty of Business Administration

Coxs Bazar International


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nder the authority of !entral ban", monetary #olicy is a macroeconomic #olicy that in$ol$es controllin%

of su##ly of money and rate of interest and is the demand side economic #olicy castoff by the %o$ernment

of a country& 'he monetary #olicy is constructed to attain macroeconomic %oals that in$ol$e inflation,

de#letion, de$elo#ment and li(uidity&

ow It !orks

'he mechanisms em#loyed by the !entral ban" )or" by increasin% or decreasin% total li(uidity in the

economic system of a country& 'his ta"es account of the total amount of ca#ital accessible for in$estment

e*#enditure, as )ell as money to lay a)ay& In another sense, it+s more than the su##ly of money, )hich

consists of broad money, 1, -currency in circulation . chec" de#osits in the ban"in% or%ani/ation and

2 -1 . money mar"et funds . !Ds . sa$in%s accounts& As a result, )hen #eo#le %enerally sayin%

that central ban" tools affect only the money su##ly, they are lettin% the cat out of the ba% about the

im#acts of monetary #olicy&

Monetary "oli#y vs $is#al "oli#y

It is usually better to construct a monetary #olicy in coordination )ith the fiscal #olicy of the national

%o$ernment& 'he reason behind this is that elected officials of the national %o$ernment %et reelected dueto the #ro%rams are underta"en by the %o$ernment mi%ht be acce#ted by the #eo#le or mi%ht be reected&

So the fiscal #olicy is in %enerally is e*#ansionary& So, the monetary #olicy in %enerally tries to construct

a restricti$e monetary #olicy&

Fatefully, durin% the last recession #eriod -20032012, the )orld economy suffered a lot thou%h the

Ban%ladesh economy had a stable #osition due to less contribution to)ard the e*#ort of %oods& 'hat

mi%ht be hel#ed a little to face the crisis, but the economists and #olicy ma"ers must stay alert around the

future concerns& Besides, this ma"es fiscal #olicy contradictory ust )hen it is re(uired to be

e*#ansionary&

%ools of Monetary "oli#y

ost of the central ban"s follo) commonly mechanisms, thou%h there are more to be follo)ed& All

these mechanisms directly influence the li(uidity in an economy system&

Ban%ladesh ban" has fi$e maor mechanisms& Firstly, settin% u# a reser$e re(uirement for the ban"in%

system of Ban%ladesh, )hich instructs ban"s ho) much of their money must ha$e in their $ault5 It )as to

a$oid the ris"s of lendin% 1006 of ban"s money to the consumers&

Secondly, Ban%ladesh Ban" can easily control ban"7s reser$e )ith the ban" rate& 'his is the interest rate

for ban"s to be char%ed a%ainst each other to store e*cess cash )hen re(uired o$erni%ht& 'his rate has a

$ital influence o$er all interest rates, includin% ban" loan rates and mort%a%e rates to the consumers&

'hirdly, another im#ortant instrument is used by the central ban" to e*ert the monetary #olicy is the ban"

discount rate& 'his is the rate char%ed by the central ban" )hen it lends money to other ban"s in case ofemer%ency& 'his discount rate is in %eneral hi%her than the ban" rate&

Fourthly, the Ban%ladesh Ban" uses 88 -8#en ar"et 8#eration to buy and sell treasuries and other

%o$ernment securities from its member ban"s& 'his mechanism chan%es the amount of reser$es ban"s

actually ha$e on hands to lend, )ithout chan%in% the reser$e re(uirement set by central ban"&

Fifthly, li"e many central ban"s, the Ban%ladesh ban" tries to "ee# the inflation rate in an e*#ected ratio&

'hat7s because it is usual for the #eo#le to buy no) if they can e*#ect an increase in #rice&

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$in&in's of the Monetary "oli#y of Ban'la&esh

Monetary (oli#y )*++Monetary (oli#y )*++ ,-anuary.-une/ Monetary (oli#y )*++ ,-uly .De#e0ber/

1b2e#tives

3

%ar'ets

1& Su##ort %o$ernment7s %oal&2& ore ra#id economic %ro)th&& 9eduction of #o$erty4& Stability in %eneral #rice le$el&& !ontrol o$er broad money -1 %ro)th&;& broad money -2 %ro)th&

2& !han%es in reser$e money to control broad money %ro)th&& ana%ement of day to day cash money and li(uidity&

4& 'he increase of money stoc" %ets #re$ented due to funds flo)s in

the local mar"et&

1& Inter$entions in #olicy interest rate and (uantity based moneystoc"&

2& 'o increase the reser$e money, day to day mana%ement is

im#lemented&

I0(a#ts

1& Increased acti$ities of a%riculture sector are out#ut&2& Stron%ly increased =*#orts returned&& Increased (uantum inde* of medium > lar%e scale industries&4& ?ea"ened (uantum inde* of Small scale industries&& ?ea"ened @ro)th in )or"ers7 remittance inflo)s&;& Increasin% local credit %ro)th&& Slo)er %ro)th in @lobal out#ut&3& o chan%e in ris" factors of e*ternal sector&C& Increasin% %lobal #rices of merchandises remain same in

Ban%ladesh&

1& Substantially increasin% #roducti$ity and in$estment acti$ity&2& @D< %ro)th is #recise close to tar%et&& Increasin% %ro)th in Industrial sector&4& Increasin% %ro)th in Ser$ice sector&& Decreased %ro)th in A%riculture sector&;& 'he inflation is increased a little more&

Monetary (oli#y )*+)Monetary (oli#y )*+) ,-anuary.-une/ Monetary (oli#y )*+) ,-uly .De#e0ber/

1b2e#tives

3

%ar'ets

1& 'o "ee# e*#ected inflation rate&2&


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I0(li#ations

1& Increasin% %o$ernment borro)in% from ban"in% system to control

li(uidity of commercial ban"&2& Follo)in% of a restrainin% monetary #olicy&

1& Follo)in% of a restrainin% monetary #olicy&2& Increasin% %o$ernment borro)in% from ban"in% system to control

li(uidity of commercial ban"&& broad money -2 %ro)th&2& !han%es in reser$e money to control broad money %ro)th&& 'he increase of money stoc" %ets #re$ented due to funds flo)s in

the local mar"et&

I0(a#ts

1& @D< has a realistic %ro)th&2& Increase in net Forei%n Assets&& @o$ernment borro)in% is in e*#ected ratio&

4& Lo) ban" #rofitability&& Increase in reser$e money )ith a reduction in broad money

su##ly&

1& Increase of money $alue&2& Satisfactory %ro)th in @D


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Monetary (oli#y )*+5 ,-anuary.-une/ Monetary (oli#y )*+5 ,-uly .De#e0ber/

1b2e#tives

3

%ar'ets

1& Attain e*#ected inflation rate&2& @ro)th in reser$e money&& Decrease %ro)th in un#roducti$e sector&4& =m#hasi/e %ro)th in a%ro and S= sector&& @ro)th in @D broad money -2 %ro)th&& 'he increase of money stoc" %ets #re$ented due to funds flo)s in

the local mar"et&

I0(a#ts

1& Increase of money $alue&2& Satisfactory %ro)th in @D


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Analysis of the 0onetary (oli#y in Ban'la&esh

In case of a de$elo#in% country li"e Ban%ladesh, onetary #olicy #lays a "ey role in loo"in% after the

rate of %ro)th of the economy of a nation by mani#ulatin% and adustin% the accessibility to credit, by

maintainin% a moderate inflation rate and maintainin% an e(uilibrium #osition in the Balance of


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im#orts and e*#orts& onetary #olicy is the mechanism that can ser$e to fill this %a# by follo)in% a hi%h

rate& A hi%h rate of interest #romotes the inflo) of forei%n currencies in form of in$estment )hich assist

in fillin% the %a# in the remainder of #ayments&

Interest Rate "oli#y7

In de$elo#in% countries li"e ours, a #olicy )ith a hi%her rate of interest can boost #ersonal sa$in%s of the#eo#le that )ill assist our ban"in% system to de$elo# as the #eo#le )ill be ado#tin% more ba"in% habits&

'he moneti/ation of the nonmoneti/ed sector )ill be fostered as )ell as the intermediary role of the

financial institutions )ill be bri%hter& ost of all, a monetary #olicy )ith a hi%her rate of interest is in

nature antiinflationary&

Furthermore, hi%h interest rate assists in the allotment of scarce ca#ital resources in more industrious

manners& In some instances, a hi%her rate of interest discoura%es ne) in$estment, but most of the

economists thin" of it is not the issue as the in$estment is interest inelastic in de$elo#in% countries li"e

Ban%ladesh& 'his is becauseE interest #ays out only a minimum #ercenta%e of the total monetary $alue of

the in$estment& Des#ite these lines, in case of Ban%ladesh as a de$elo#in% economy, it )ill be su%%ested

to create a monetary #olicy that )ill be discriminatory in nature&

%o Create Bankin' an& $inan#ial Institutions7

A "ey tar%et of the monetary #olicy of Ban%ladesh Ban" is to de$elo# the financial institutions in order to

boost u# the ca#ital formation throu%h the mobili/ation of scarce ca#ital in the economy& nder this

incenti$e, Ban%ladesh ban" is encoura%in% commercial ban"s to #romote their ban"in% acti$ities in rural

re%ions of Ban%ladesh& So Ban%ladesh ban" focuses on formin% such a monetary #olicy that )ill assist in

moneti/in% the #re$iously nonmoneti/ed sector and further u# the ca#ital formation in the economy& All

these facts are hi%hly crucial for the %ro)th of any de$elo#in% economy li"e Ban%ladesh&

Debt Mana'e0ent7

Debt mana%ement is another critical role #layed by the monetary #olicy to foster the economic %ro)th in

de$elo#in% countries li"e Ban%ladesh& It is the functionin% of a central ban" )hich trades )ith #ro#er

timin% and issuin% %o$ernment bonds and securities, adustin% the #rice of securities at a steady le$el and

of course minimi/in% the cost of a$ailin% the #ublic debt&

As a result, as denoted abo$e, a %ood monetary #olicy hel#s in "ee#in% the inflation rate at e*#ected le$el,

brid%in% the %a# in balance of #ayment -B8


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& 'he tar%et of monetary #olicy should be disclosed to mass #eo#le and their o#inions re%ardin% the

#olicy should be reflected in further #olicy de$elo#ment&

4& onthly re$ie) of the #ro%ress re%ardin% control o$er the inflation rate and chan%es in the B


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!orks Cite&

Abdullah, & &, 'ooheen, 9& B& -2012& Im#acts of onetary Af/al, & & -201& 'he =ffecti$eness of onetary


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Borda, Sons, e) Kor", K,

-1CC&

Farrell, i"e, International Im#act of &S& oney Su##ly: 'he !ase of e*ico,M

American =conomic 9e$ie), -Gune 1C30, ##& 4#44&

Friedman, BenaminE uttner, &, oney, Income,


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ohanE 9, Ponetary

Monetary Policy of BD

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