Tight on Rates, Flexible on Investment
Graphics: Agamir Somoy
Bangladesh Bank on Tuesday announced its monetary policy for the first half of fiscal year 2026-27 (July-December), keeping the policy interest rate unchanged at 10 percent as inflation remains elevated.
Deputy Governor Dr. Habibur Rahman presented the monetary policy under the chairmanship of Bangladesh Bank Governor Mostaqur Rahman. When the policy rate remains unchanged, banks’ funding costs do not decline. As a result, borrowing costs for businesses and industrial entrepreneurs remain relatively high, raising concerns that new investment could be discouraged.
At the same time, the central bank has raised its target for broad money (M2) growth to 13 percent by June 2027, up from 10.8 percent through June 2026, in an effort to support investment.
Notably, Bangladesh Bank has kept the policy rate unchanged at 10 percent while simultaneously increasing its money supply target. In other words, the central bank seeks to maintain a tight stance to contain inflation while allowing greater liquidity to support investment and economic growth. The move reflects an attempt to strike a cautious balance between the two objectives.
At the beginning of the policy presentation, Deputy Governor Habibur Rahman said the country’s economic growth should ideally range between 6 and 7 percent, but currently stands between 4 and 5 percent. In this context, boosting growth while simultaneously bringing down inflation remains a major challenge for the central bank.
As inflation has yet to fall to the desired level, Bangladesh Bank has maintained its contractionary monetary policy stance. In line with the fiscal year 2026-27 budget, the new monetary policy sets GDP growth at 6.5 percent and inflation at 7.5 percent.
To help revive private-sector lending and stimulate production, investment, and employment, the policy includes a Tk60,000 crore special incentive package for the industrial, agricultural, cottage, micro, small, and medium enterprise sectors.
Bangladesh Bank has also significantly raised its target for reserve money growth. The target for June 2027 has been set at 11 percent, compared with 7.5 percent through December 2026 and 5.21 percent for June 2025. Reserve money refers to the base money created by the central bank, which commercial banks use to generate additional loans and deposits. A higher target could increase liquidity in the banking system and strengthen banks’ lending capacity.
The central bank has also raised its target for private-sector credit growth. It aims for private-sector credit growth of 8 percent by June 2027, up from the 5.5 percent target set for June 2026. At the same time, it has increased the domestic credit growth target from 10.2 percent to 10.4 percent. According to relevant stakeholders, greater credit flows to businesses and industries could create opportunities for new investment.
Governor Mostaqur Rahman said, “The central bank has adopted a specific 18-month action plan to reduce non-performing loans. We issued the policy for the first six months yesterday. In addition, the central bank is preparing two laws for next year. One is the Money Loan Court Act and the other is the Distressed Asset Management Act. Once these laws are enacted, the situation will take on a different dimension in 2027.”
Bangladesh Bank has also raised the money multiplier, a measure of the banking system’s capacity to create money, from 5.21 to 5.30. This means banks will be able to create slightly more money and credit from the same amount of reserve money, potentially increasing their lending capacity.
According to the monetary policy statement, the economy faced multiple pressures when the current government assumed office. Weaknesses in the banking sector, declining confidence in the financial system, and high inflation placed additional burdens on low- and marginal-income groups. The government is pursuing an export-oriented and private-sector-led growth strategy while seeking to shield ordinary people from inflationary pressures.
The policy statement also noted that the global economy remains uncertain. Conflicts in the Middle East, geopolitical tensions, and risks of disruptions to fuel and fertilizer supplies could adversely affect Bangladesh’s economy. These factors could increase import costs and intensify cost-push inflation.
Bangladesh Bank said that although it has followed a tight monetary policy since August 2024, raising interest rates alone cannot fully control inflation. A significant portion of current inflation stems not from excess demand but from weaknesses in supply systems, market inefficiencies, and supply chain disruptions. At the same time, high interest rates, economic uncertainty, rising non-performing loans, and increased government borrowing have significantly reduced demand for private-sector credit.
The central bank believes that the rationalization of tariffs and taxes in the new fiscal year’s budget, along with targeted credit support, will gradually revive investment and economic activity. However, uncertainty in energy supplies, cost-push inflation, weaknesses in the financial sector, high levels of non-performing loans, and global economic instability will continue to pose major challenges for the economy in the coming years.
