Bangladesh raises interest rate by 50 bps to fight inflation

Bangladesh’s central bank raised its key interest rates by half a percentage point on Thursday, its second hike in a month, as it battles stubbornly high inflation.

The central bank said it had raised the repo rate, which it uses to inject money into the banking system, by 50 basis points to 5.50% to deal with demand side pressures and to ensure the flow of funds to priority and productive sectors.

The move came after the south Asian country's annual inflation hit an 8-year high in May. The central bank last raised the key interest rate by 25 basis points on May 29.

The bank said it would continue its support to implement the government's ongoing 2 trillion taka ($21.40 billion) stimulus packages alongside its own refinance schemes in the face of new adversities, including the Russia-Ukraine war and the Covid-19 pandemic.

The central bank also raised the private sector credit growth target to 14.1% for the 2022/23 financial year that starts on July 1 from 13.1% in the current financial year.

It said it would introduce a new refinance line of credit for import-substituting products to minimise import dependency and save valuable foreign exchange reserves.

Bangladesh's foreign exchange reserves fell to $41.9 billion as of June 28 from $46.4 billion at the end of June 2021, the central bank said.

With reserves dwindling, the government has taken a series of measures including curbing non-essential imports, relaxing rules to attract remittances from millions of migrants living overseas and restraining foreign trips of its officials.

Bangladesh aims to boost economic growth to 7.50% for the 2022/23 financial year from 7.25% in 2021/22 on the back of garment exports and remittances from Bangladeshis working overseas.

The central bank, however, said deadly flooding this month and a prolonged Russia-Ukraine war could hold back growth.