Bangladesh raises key interest rate to fight inflation

The central bank raised the repo rates by 50 basis points in November. It targets economic growth at 6.5% and inflation at 7.5% in the current financial year, which ends in June.

Bangladesh's central bank raised its key interest rate by a quarter percentage point on Wednesday, in the second hike since November as it steps up a battle to rein in inflation.

The central bank raised the repo rate used to inject money into the banking system to 8% from 7.75% so as to curb inflation, Governor Abdur Rouf Talukder said while unveiling monetary policy for the period from January to June. December inflation edged lower to 9.4% from a month before but the 2023 average of 9.5% was the highest in a decade.

Prime Minister Sheikh Hasina, who won a fourth successive term in a Jan. 7 election boycotted by the main opposition party, said last week that taming inflation and reviving the economy were her government's first priorities. Sharply rising living costs sparked violent protests in the months before the election, as Hasina's government struggled to pay for costly energy imports due to shrinking dollar reserves and a weakening domestic currency.

The central bank is also weighing adoption of a crawling peg system for the currency, to stabilise exchange rates and stem depletion of foreign exchange reserves. "This strategy is aimed at tempering unusual fluctuations in the currency's value," it said in its monetary policy statement.

"By setting a competitive equilibrium exchange rate at the midpoint of the corridor, the central bank would establish a stable benchmark while retaining the flexibility to intervene in the market as necessary to maintain the currency within the designated boundaries." The central bank also cut the target for private sector credit growth to 10% from 11% now.

The economy has slowed sharply since the Russia-Ukraine war pushed up prices of fuel and food imports, forcing Bangladesh to turn last year to the International Monetary Fund for a $4.7-billion bailout. The central bank raised the repo rates by 50 basis points in November.

It targets economic growth at 6.5% and inflation at 7.5% in the current financial year, which ends in June.