Global commodity price hikes could jeopardize inflation target: BB

TBS Report

March 02, 2022, 9:35 p.m.

Last modification: March 2, 2022, 9:38 PM

When the money supply increases and the demand continues to increase, the prices of various products and services may also increase. Photo: Collected

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When the money supply increases and the demand continues to increase, the prices of various products and services may also increase. Photo: Collected

Bangladesh Bank Monetary Policy Review

  • Driven by the non-food component, headline CPI inflation rose to 6.05% in December 2021

  • Year-over-year average CPI inflation climbs to 5.55% in December 2021, slightly above the 5.30% target set for FY22

  • Price pressure is expected to continue for some time

  • Robust import growth, coupled with recent growth moderation, growth in inward remittances could create an unfavorable balance of payments position

Bangladesh’s economy has rebounded strongly from the pandemic-induced slowdown, but recent surges in global commodity prices – aided by ongoing geopolitical disputes – could create price pressure for the country, forcing the government to miss its inflation target, observes the Bangladesh Bank. .

In its 2021 monetary policy review, released on Wednesday, the central bank also addressed a number of risks, including negative pressure on the balance of payments amid high imports and the severity of the ongoing pandemic, which could cloud growth prospects.

The Bangladesh Bank, however, has hinted that it will continue the current expansionary and accommodative monetary stance as other global central banks opt for money supply compression to curb inflation.

“Recent global commodity price increases amid ongoing geopolitical disputes could put inflationary pressures in the coming days, making it difficult to keep CPI inflation within the target set for FY22.” , says the review report.

“Driven by the non-food component, headline CPI inflation trended upwards in the first half of FY22, reaching 6.05% (point-to-point) in December 2021, mainly due to the pass-through of high world commodity prices to supply. shocks, higher shipping costs and the ripple effect of a recent upward fuel price adjustment (diesel and kerosene) in the domestic market.

Headline inflation is the raw inflation figure reported by the Consumer Price Index (CPI) published monthly by the Bureau of Labor Statistics. The CPI calculates the cost of buying a fixed basket of goods, in order to determine the level of inflation that occurs throughout the economy.

“Similarly, the year-over-year average CPI inflation climbed to 5.55% in December 2021, slightly above the 5.30% target for FY22.”

“Price pressure is expected to continue for some time and may miss the FY22 target,” the report said.

The robust growth in imports in addition to the recent moderation in the growth of inward remittances could create an unfavorable position in the balance of payments, according to the report.

The current account (CA) balance recorded a large deficit of $8.2 billion in the first half of the current fiscal year compared to a surplus of $3.52 billion in the corresponding period of the previous year due to a decline in remittances and a widening trade balance in the face of a faster increase in import payments than export receipts, according to the report.

Despite a growing surplus in the financial account, the overall balance showed a deficit of $1.8 billion, creating downward pressure on the exchange rate during this period.

The central bank’s official foreign exchange reserve stood at $46.2 billion at end-December 2021, equivalent to 5.6 months’ forward-looking import payments.

Addressing credit demand, the review report indicates that the growth of credit flows to the private sector continued to accelerate, reaching 10.68% at the end of the first half of FY22, helped by the recovery of global demand on the one hand and the low global cost of credit on the other hand. The other.

An acceleration in private credit growth and the catching-up measures taken by the Bangladesh Bank to streamline liquidity in the banking system have together pushed up interest rates in the interbank market.

By contrast, interest rates in the retail market remained subdued.

The central bank in its review report observed a strong recovery in the country’s economy.

“Despite slow and uneven global economic recovery trends, Bangladesh’s economy exerted a strong rebound with real GDP growth of 6.94% in FY21 after the economic fallout from the Covid-19 pandemic. 19, helped by well-coordinated monetary and fiscal policies, better management of the pandemic situation and renewed business confidence.

“The speed of this recovery appears to have strengthened further in the first half of FY22, despite the emergence of the Omicron variant of Covid-19, reflected by increased import and export demand, a peak in demand for private credit and strong growth in large- and medium-scale manufacturing.”

Amid the declining rate of Covid-19 infections, the ongoing extended vaccination program, continued growth-supporting fiscal and monetary measures, as well as solid import and export growth, are expected to contribute to further strengthen the economic recovery by achieving real GDP growth of 7.2%, a target set for FY22, the report said.

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