BB is preparing to bring the excess money supply under control

The Bangladesh Bank yesterday decided to mop up excess liquidity as it hurts banks, savers and small borrowers and threatens to create instability in the economy through asset bubbles.

As part of the intervention, the central bank will relaunch the BB Bill, an instrument that was last used in March 2018, to allow lenders to invest unused funds.

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Bankers hailed the central bank’s move, saying it would help reduce excess liquidity effectively.

The initiative will also give a respite to depositors whose incomes have been battered by the lack of an expected rate on investment due to a negative return on savings.

The program will hardly send the lending rate higher, given a large amount of excess liquidity available in the banking system.

The first auction of the “Bangladesh Bank Bill” will take place on August 9. A total of 9 auctions will be organized throughout this month.

The BB has written to all banks and non-bank financial institutions, saying the initiative will help control excess liquidity.

“It will also keep the money market stable,” he said.

Excess liquidity in the banking system stood at Tk 231,462 crore in June, up 66% year-on-year and 9% a month ago.

The surplus fund has maintained an uptrend since March of last year after the central bank took several steps to pump money into the market to offset the slowdown in business caused by the coronavirus pandemic.

However, this decision has failed to revive the growth of credit to the private sector, as the pandemic has not yet been brought under control.

Credit growth to the private sector stood at 8.40 percent last year against the central bank’s target of 14.80 percent. In the context, a massive injection of capital into the market made money cheaper than ever, pushing down the interest rate on deposits.

A BB official said the central bank took the lead as part of its latest monetary policy, which indicated the withdrawal of excess funds in phases.

The central bank unveiled an “expansionary and accommodating” monetary policy on July 29, aimed at keeping funds available for the productive sector and curbing its flows to unproductive sectors such as the stock market and the housing sector.

Withdrawing excess liquidity will also help the central bank to contain inflation. It has failed to keep inflation within target over the past year.

The central bank generally mops up the money using three instruments: the BB Bill, the reverse repo (repo agreement) and the cash reserve ratio (CRR).

There are three categories of BB Bill according to their maturity: 7 days, 14 days and 30 days. The BB will organize auctions for all three types of tickets.

Mirza Elias Uddin Ahmed, Managing Director of Jamuna Bank, said: “This is a timely decision, as some banks are looking forward to it.

The BB Bill interest rate ranged from 2.97% to 2.98% in March 2018, when the central bank held the last auctions.

However, the interest rate can become a big factor because the current 91-day Treasury bill rate is 0.55%, Ahmed said.

The BB Bill’s rate is usually slightly higher than the 91-day T-bill, an instrument through which the government borrows money from the banking industry.

Although the rate is determined by auctions, the central bank has an important role to play in raising the rate.

If the central bank accepts a sufficient number of bids, the yield on the instrument will automatically increase, Ahmed said.

“This will encourage many banks to participate in the auctions,” he said.

He also suggested that the central bank reopen the reverse repo, which has been suspended since November 2015.

The reverse repo rate is a rate at which a central bank borrows funds from banks to compress the money supply in the market.

BB officials say the reverse repo rate is very high compared to the deposit product rates offered by banks.

The reverse repo window will allow banks to invest funds at 4% in the central bank overnight.

Many banks now offer interest rates between 2% and 3% on their term deposit receipts (FDRs). Thus, reopening the reverse repo is not viable at the moment, said a central banker.

But, Ahmed of Jamuna Bank said the central bank should reopen the window by lowering the interest rate to around 2%.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, echoed Ahmed, saying the BB may consider reopening the reverse repurchase agreement.

Appreciating the central bank’s move, he said banks would be more interested in investing in the BB Bill if they got a hefty interest rate.

Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, said the central bank should mop up at least Tk 33,000 crore immediately in order to stabilize the money market.

The withdrawal of excess liquidity will not create any obstacle to the implementation of expansionary monetary policy by the BB, he said.

Small savers will benefit from the program as the interest rate on deposits rises alongside the reduction in excess liquidity, said Mansur, also a former head of international monetary policy.

Withdrawing the funds will not have any negative impact on the lending rate, as such a volume of additional money is not needed to materialize the expansionary monetary policy, he said.

“Nonetheless, the central bank should carefully monitor the money market so that banks cannot manipulate the lending rate under the pretext of withdrawing excess funds.”

“We must keep in mind that the excess fund is invested in the capital market, where a bubble has already been created. Such a bubble must be contained at all costs, otherwise it will create instability in some areas of the economy. macroeconomics. ”

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