Key Points

Policy Stance
Bangladesh Bank has projected the average inflation to be within
5.5% - 5.9%. Looking forward, the targeted rate need to be
monitored vigilantly as upward pressure from food items may
emerge.

Bangladesh Bank has kept the policy rate unchanged with repo rate
at 6.75% and reverse repo at 4.75%. Considering the risk of rising
inflation from higher commodity prices, the policy rates will be
reviewed on a continuous basis and can be changed promptly if
needed.

The projected credit growth target in public sector for FY18 is 12.1%
and credit growth target in private sector for FY18 is 16.3% .

The broad money (M2) and reserve money growth rate has been
targeted at 13.9% and 12.0% in accordance with the targeted credit
growth rate.

The expected real GDP growth is 7.1% - 7.4% plus in FY18

Source : Monetary Policy Statement July - December 2017
Risks of modest global growth, weak remittance inflows, upward
inflationary pressure from rise in food prices and its impact on non-
Chart 1: Current vs Target status food items need to be closely monitored.

Bangladesh Bank has found no incident of breaching the regulatory

5.70%
Inflation limit of capital market exposure by banks and its subsidiaries.
5.44%
However Bangladesh Bank will be more watchful during the boom
12.90%
Broad Money Growth times as a part of precautionary measurements.
11.70%
12.80%
Reserve Money Growth
13.30% Core objective
16.20%
Private Sector Credit Growth The core objective of Bangladesh Banks monetary policy is to maintain stable
16.00%
inflation combined with supporting the growth momentum and employment
3.80% generation. The H1FY18 MPS has been planed out to keep the average inflation
Public Sector Credit Growth
-16.20% below 5.5% by balancing the output and inflation risks for the economy over next
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00% one year.

Target for Dec'17 Current Status (as of May'17) Policy Rates Remain Unchanged

Source : Monetary Policy Statement July - December 2017 Bangladesh Bank has kept the policy rates unchanged with repo rate at 6.75% and
reverse repo at 4.75%. Call money rates are in rising trends as credit growth has
surpassed the deposit growth in recent months. If the public sector borrowing
Chart 2: Inflation Rates % (2005-06 Base)
from banking system edge up in upcoming months as planned in the monetary
policy, call money rates will continue to increase gradually.
10.00% Inflation Rate
Broad and Reserve Money growth rates are likely to remain below the
8.00% programmed growth rate

Reserve Money, Broad Money (M2), and Domestic Credit growth were 13.3%,
6.00%
11.7%, and 11.3% respectively till May, FY17 and were well below the planned
ceilings. This helped to achieve the inflationary performance in FY17. Credit to
4.00%
public sector declined by 16.2% in May, FY17 as government has paid off T-bills/T-
bonds with the proceeds from NSCs sales. Private sector credit growth was 16.0%.
2.00% Credit growth in recent times has exceeded the deposit growth and improved the
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Jun-15

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Nov-14

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Jun-17
Jul-14

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Jul-16
Oct-14

Oct-15

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Sep-14

Feb-15

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Sep-15

Feb-16

Apr-17
Aug-14

Mar-15

May-15

Aug-15

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May-16

Aug-16

Mar-17

May-17
Jan-15

Jan-16

Jan-17

SLR asset to TDTL ratio which denotes excess liquidity. During FY17 governments
excess financing through NSCs lowered the inflationary impact. Hence, it left
General (P2P) Food (P2P) Non-food (P2P)
greater room for private sector borrowing.
Source : Bangladesh Bank
Table 1 : Balance of Payments Highlights Inflation may remain within 5.5% - 5.9%

Average CPI inflation came down to 5.44% in June, FY17 and was below the
Major Items
programmed ceiling of 5.8%. The larger component of P2P CPI inflation, food item
(In Billion USD) Actual Estimate Outlook
is increasing since January, FY17 mainly because of the crop losses by flood in the
northwestern haor area. The smaller component, non-food item is also increasing
2015-16 2016-17 2017-18 gradually since February, FY17. Looking forward, Bangladesh Bank has projected
Trade Balance -6.3 -9.3 -11.0 the annual inflation for H1FY18 to be around 5.5% - 5.9%. Considering the
Services -2.8 -3.5 -3.5 domestic scenario some upward pressure may arise from increasing food prices
Primary Income -1.9 -2.0 -2.0 but favorable US, EU, and regional inflationary outlook may ease that emerging
Secondary Income 15.4 13.2 13.9 domestic inflationary pressure.

of Which : Workers' Re- Higher remittance may set the overall balance at USD 2.3 billion surplus
mittances 14.7 12.6 13.2
During FY17, subdued export growth of 1.7%, declined remittance inflows of
14.5%, and import growth of 9.0% have widened the trade deficit and created a
Current Account Balance 4.4 -1.6 -2.7 shortfall in the current account balance. Remittance inflows are suffering mainly
Capital Account 0.5 0.3 0.6 due to unfavorable migrant workers demand in middle east areas and high cost
Financial Account 0.9 4.5 4.4 burdens of AML/CFT regulations compliances for sending remittances. Besides,
Taka depreciated in response to weakening export and workers remittance
Errors and Omissions -0.7 -0.2 0.0
inflows. Bangladesh government and Bangladesh Bank are working proactively to
Overall Balance 5.0 3.1 2.3 widens the use of legitimate channels of remittance inflows. Government is also
trying to bring the savings of emigrants by promoting sales of Bangladesh
Source : Monetary Policy Statement July - December 2017 Governments Wage earners Bonds and Taka treasury Bonds (BGTBs) which gives a
higher yield and easing the loan facilities to invest in real estate. Considering a
Chart 3 : GDP Growth (%) widening trade balance deficit and declined remittance inflow Bangladesh bank
projects the current account balance will be negative by USD 2.7 billion and the
7.50%
overall balance will be positive by USD 2.3 billion.

7.00% Growth is projected to be 7.1% - 7.4% in FY18

Economy grew by 7.24% in FY17 well above than the projection of 7.1%. Strong
6.50% growth in private sector credit, private investment and consumption, domestic
manufacturing, agriculture and service sector contributed largely to this growth
6.00% momentum. Whereas weaker performance in export manufacturing growth and
14.5% decline in remittance inflow eroded some growth potentials. Total domestic
investment also increased to 30.3% of GDP in FY17 largely because of the
5.50%
government's investment program.

5.00% Going forward, Bangladesh Bank projects the GDP growth for FY18 to be within
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 7.1% - 7.4%. This forecast has an underlying assumption of political stability.

Source : Bangladesh Bank Capital Market Outlook

In the premier bourse (DSE) the broad market index (DSEX) has increased 20%
Chart 4 : DSEX and Volume since November 2016. The foreign portfolio investment (FPI) increased more than
three fold in Q2FY17 which contributed a lot to the recent upsurge in the capital
25.00 6000 market.

To ensure that capital market fosters long term investment while keeping the
20.00 5500
In BDT billions

uptrend in rational boundaries banks had been directed to remain within the
statutory limit of capital exposure in H2FY17 MPS. However, Bangladesh Bank has
15.00 5000
found no incident of breaching the regulatory limit of capital market exposure by
10.00 4500 banks and its subsidiaries. Bangladesh Bank is also eager to work with the regulator
Turnover
of capital market and other stakeholders in developing a startup financing
5.00 4000 DSEX ecosystem for entrepreneurs of Bangladesh.

- 3500 An important element of an interest targeting monetary framework is a well

functioning bond market which will help the short term policy rate to influence
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3-May-17

long term interest rate. Though governments non bank borrowing has lowered the
inflationary impact, increased financing cost disrupts bond market development. In
this context, government needs to align various risk free interest rates, restructure
the returns on NSCs, and shift government borrowing composition toward market
Source : DSE, SSL Research based borrowing.