Bangladesh Development Update


Inflation has decelerated, but the level is still high



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Inflation has decelerated, but the level is still high


  1. The behavior of inflation has been somewhat erratic.9 Inflation started decelerating from the second half of FY12.10 The overall inflation rate (measured by the new CPI) on a point-to-point basis peaked at 12.7 percent in September 2011. Since then the overall inflation rate declined steadily to 5 percent in September 2012, primarily due to falling food prices which counteracted the rise in nonfood prices during a large part of the same period. Inflation rose back to 8.4 percent in April 2013, driven initially by a rising non-food price index and subsequently by rising food prices, before declining to 7.4 percent in August. The recent decline in inflation reflects drops in both food and nonfood prices. Although the deceleration has brought some relief to policy makers, the level of inflation is still high compared to other developing countries (Figure 6).

  2. Softer international prices helped moderate domestic food price increases. Prices of internationally-traded food declined for the third consecutive quarter since their historical peak in August 2012.11 Increased global supplies and large stocks and declining demand from large importers exerted downward pressures on international prices. The prices of major commodities for which Bangladesh is highly import-dependent, softened with the appreciation of taka against US dollars as well as Indian rupees. A falling rice price during February-December 2012 was a major driver of the fall in food prices, but from December to end-June 2013 the rice price has risen by 17 percent.

  3. Monetary policy played an important role in controlling nonfood price rises, reducing pressures on the balance of payments, and stabilizing the exchange rate. The conduct of monetary policy improved remarkably in FY13. The Bangladesh Bank (BB) started effective implementation of tightening measures from January 2012 and broadly achieved the monetary targets for FY12 and FY13. During FY10-11, broad money (M2) expansion exceeded the targets set under the BB’s Monetary Policy Statement (MPS) by significant margins, thus helping fuel the inflationary pressure in the economy. But after the adoption of a tighter monetary policy stance at the beginning of 2012, liquidity expansion started to decelerate and was essentially limited to levels targeted under the MPS announced by the BB. Broad money growth in FY13 declined to 16.7 percent, compared to 17.4 percent growth in FY12 (Figure 7). Private sector credit growth shrank to 11 percent, well below the 17.7 percent target, and public sector credit grew 22.6 percent, slightly higher than the 20.3 percent target.

  4. Bangladesh Bank has signaled its decision to stay the course on monetary discipline in FY14, despite the forthcoming elections. The BB’s MPS for July-December 2013 envisaged targeting a monetary growth path to curb inflationary pressures “while ensuring that credit growth is sufficient to stimulate inclusive growth”.12 It sought to keep broad money growth at around 17 percent while raising domestic credit growth to 17.2 percent and private-sector credit growth to 16.5 percent. These are consistent with sustaining GDP growth at around 6 percent and lowering inflation to 6.5 percent (2005/06 base) while meeting private-sector credit demand and providing financing for the FY14 budget. However, a 6.5 percent inflation target is high relative to the 1-2 percent inflation rate in most of Bangladesh’s major trading partners, except India.13 This gap may complicate exchange rate management by appreciating the taka over the medium term.




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