7

Financial Market Trends and Monetary Policy Actions

Overview of FY11 developments in money and credit

1.1 Growth Outcome: While output growth in Advanced Economies and Emerging including China and

India are projected to be lower, the growth for Bangladesh economy is expected to be much higher in

2011 than that of 2010, supported by the strong domestic demand and adequate liquidity in the economy.

The real GDP of Bangladesh is projected to grow by 7 percent in FY12. According to the estimates of

Bangladesh Bureau of Statistics (BBS), the real GDP growth for FY11 is 6.66 percent which is higher

than 6.07 percent growth of FY10 and average growth of 5.88 percent of this decade. Industry grew by

8.16 percent in FY11 (6.49 percent in FY10) supported by the strong growth in exports and imports.

Service sector output growth also increased by 6.63 percent in FY11 (from 6.47 percent in FY10), while

Agriculture sector output growth decreased slightly from 5.24 percent in FY10 to 4.96 percent in FY11.

1.2 Inflation Outcome: The headline (12-month average) CPI Inflation continued edging up in FY11 since

September 2010 (Chart 1), rising to 8.80 percent by June 2011, a level well in excess of the 8.00 percent

projection of the revised national budget for FY11. The food component of CPI inflation has remained at

double digit levels since December 2010 (Chart 2); because of rising price trends in global markets (Chart

3) and rising input costs in domestic production. The non-food (core) CPI inflation remained low and

fairly stable in FY11, actually declining slightly from 5.45 percent at the beginning of FY11 to 4.15

percent at the end. This trend of core CPI inflation in FY11 reflects the impact of monetary policy steps

taken (50 basis point CRR & SLR increase in December 2010, 225 basis points hike in repo, reverse repo

interest rates in 4 steps in FY11). Food CPI inflation was little impacted by monetary policy steps

however, and the government needed to ease hardship of lower income population with open market food

grain sales from public stocks at below market prices.

Chart 1.1: Trends of headline annual average CPI inflation

Base: 1995-96=100)

Source: Economic Trends, BB

0.00

5.00

10.00

15.00

2009M1

2009M2

2009M3

2009M4

2009M5

2009M6

2009M7

2009M8

2009M9

2009M10

2009M11

2009M12

2010M1

2010M2

2010M3

2010M4

2010M5

2010M6

2010M7

2010M8

2010M9

2010M10

2010M11

2010M12

2011M1

2011M2

2011M3

2011M4

2011M5

2011M6

12Monthpointtopoint 12MonthAverage

8

Chart 1.2: Trends of CPI inflation (General, Food, Non-Food)

Source: Economic Trends, BB

Chart 1.3: Commodity Price Indices

(January 2003 = 100; based on prices in U.S. dollars)

Source: World Economic Outlook, International Monetary Fund, IMF, September, 2011.

1.3 Monetary and credit growth outcome: Growth in reserve money, broad money and domestic credit

remained high during FY11, overshooting the targeted ceilings by wide margins (Table 1.1). The high

monetary expansion was largely domestic demand driven; net foreign assets of the banking system grew

by a mere 5.2 percent while net domestic assets grew by 25.0 percent. Decline in governments foreign

borrowing and non-bank domestic (NSD) borrowing caused public sector domestic borrowing by to rise

34.9 percent; while sharp pick up in investment and output activities in the economy shedding the global

slowdown related lassitude caused a high 25.8 percent growth in credit to private sector. Market liquidity

both in Taka and Foreign exchange tightened sharply, requiring substantial repo fund injection and USD

0

100

200

300

400

500

2005M1

2005M5

2005M9

2006M1

2006M5

2006M9

2007M1

2007M5

2007M9

2008M1

2008M5

2008M9

2009M1

2009M5

2009M9

2010M1

2010M5

2010M9

2011M1

2011M5

2011M12

2012M12

Energy Food AgriculturalRawMaterials

0.00

2.00

4.00

6.00

8.00

10.00

12.00

12MonthAverageGeneral 12MonthAverageFood12MonthAverageNonfood

sales/overdrafts to banks from

deposit-advance ratios and len

monetary policy steps of CRR

monetary growth down from Q4

1.4 External Sector Outcome: Des

growth in both exports and imp

economy at 6.6 percent in FY1

and 4.2 percent respectively); b

strong 38.6 percent increase in

facilitated robust FY11 recove

opening of import LCs for in

machinery, petroleum & petrole

FY 2010-11 as compared to FY

Source: MPD, Banglades

Particulars

1.NetForeignAssets2.NetDomesticAssets

DomesticcreditCredittothePublicsectors(incl.Credittotheprivatesector

3.BroadMoney4.ReserveMoney

M

Machine

misc.indu

8%

Petroleu

Petro.pr

8%

Se

9

m BB to avoid market freeze up. BB monitoring o

nding practices of banks intensified considerably

increase and policy interest rate (repo, reverse repo

4 FY11.

spite moderate growth in remittances (6.3 percent), m

ports were helpful to keep domestic demand firm an

1. Though growth of imports and exports remained

but economic activities kept gradually gaining pace

n import LC settlement in FY11, compared with

ery in output activities and external trade. The s

ndustrial raw materials and some increases in con

eum products, machinery for misc. industry, and inte

Y 2009-10 have been shown below.

h Bank

Table1.1:MonetaryAggregates(YoYgrowthinpeFY10 Sep10 Dec10 Mar.11 June1

(Prog.)

41.3 27.3 14.2 7.8 1.518.8 20.2 23.4 27.2 20.0

17.6 19.8 24.4 29.0 18.8

Govt.) 5.2 5.0 10.6 28.3 29.224.2 26.7 27.6 29.1 16.5

22.4 21.5 21.7 23.5 16.0

18.1 13.1 25.9 29.1 15.0

Con

Go

1

IntermediateGoods

7%

IndustrialRawMaterials

39%Capital

Machinery

7%

eryforustries

%

umandroducts

%

Others

18%

ectoralDistributioninL/COpnening2011

on money markets, on

y; these together with

o) hike started slowing

more than forty percent

nd to grow Bangladesh

subdued in FY10 (5.4

throughout FY11. The

7.50 percent in FY10

significant increase in

nsumer goods, capital

ermediate goods during

ercent)

1 June11 June12(Actual) (Prog.)

5 5.2 1.60 25.0 22.1

8 27.4 20.0

2 34.9 28.1

5 25.8 18.0

0 21.3 18.5

0 21.1 16.0

nsumeroods

13%

10

1.5 Interest Rates and Exchange Rates: Lending interest rate caps imposed earlier in the backdrop of global

slowdown have been phasing out steps by steps since March 2011 in the changed face of high and rising

demand starting with loans other than industrial term loans and loans for export, agriculture and essential

imports (MPS, July 2011). Overnight Taka interest rates in the inter-bank market firmed up in FY11, the

weighted average call money rate rising from 3.33 percent in July 2010 to over ten percent in June 2011

due to higher credit demand and seasonal factors. Customer deposit and lending interest rates of banks

remained stable in FY11 little changed however observed after March 2011; the weighted average lending

and deposit interest rates increased from 11.17 and 6.0 percent of September, 2010 to 12.40 and 7.26

percent respectively in June 2011 following withdrawal of cap on the interest rates. The appreciation

pressure on exchange rate of Taka against USD in FY10, mainly due to sluggish imports, slower workers

remittance inflows have reversed in the beginning of FY11. Taka was in depreciation pressure from

growth slowdown in workers remittance inflows and strong rebound in imports, requiring occasional

market interventions by BB with USD sales. To restrain credit growth in controlling inflation BB, repo

and reverse repo have been raised a total of 275 basis points in five steps from August 2010 to September,

2011 along with Cash Reserve Requirements (CRR) and Statutory Liquidity Requirements (SLR) by 50

basis points in December, 2010. BB also has to inject a large amount of Taka and USD to maintain

stability in the interbank money market. BBs injected a total of Taka 80.37 billion as repo liquidity

support, USD 962 million net sales in the interbank foreign exchange market, USD 427 million short term

overdrafts to banks at the end of FY11 (MPS, July 2011). Taka depreciated by 6.4 percent between FY10

to FY11 which helped to increase inflows of remittances and export competitiveness during this period.

1.6 Fiscal Developments: As mentioned in the MPS, BB Government bank borrowing from the banking

system increased sharply following decline in external sector borrowing and also reduction in

Government borrowing through NSD instruments. The sale o NSD declined mainly due to lower profits

from holding this government borrowing instruments. The overall budgetary deficits are projected to be

3.8 and 4.4 percent of GDP for FY11 and FY12.Table-2 shows the Government Budget Financing in

FY11 and FY12.

11

Table 1.2: Budget Financing

1.7 Monetary Policy Stance for H1FY12: BBs monetary policy stance announced in MPS, July 2011 for H1

FY12 was a continuation of the earlier broadly growth supportive stance with discouragement of credit

growth for unproductive and speculative uses. Even though mature advanced economies in North

America and Europe face growth slowdown due to high level of household and public debt; Bangladesh

economy is expected not to suffer growth deceleration; domestic demand supported by workers

remittance inflows, agriculture and SME financing initiatives of the financial inclusion campaign and

export demand in newer markets in faster growing emerging economies in Asia and South America are

expected to compensate for demand weakens faced in traditional markets in North America and Europe.

BBs Monetary program for FY12 aims at maintaining tightened grip on market liquidity to hold

inflationary pressures in check; so as to keep annual average core CPI inflation at lower single digit levels

(upward revisions in administered energy prices in FY12 will cause some unavoidable rise in core CPI

inflation however); and to bring down the annual average headline CPI inflation to 7.5 percent by FY12.