The biggest problem currently facing Bangladesh’s economy is soaring commodity prices.
Global commodity price volatility coupled with rising US dollar prices is currently fueling inflation in the country. An increase in aggregate demand in the domestic market after the start of the recovery from the fallout from Covid-19 also contributed to the rise in inflation.
To successfully control inflation, we must get to the root of the problem.
We do not have the ability to control the world market situation. Monetary policy and fiscal policy can do a lot to restrain domestic demand, even if monetary expansion is not the main reason for domestic demand so far. So far, money growth has been in the single digits.
The first thing we need to look at is what different central banks around the world usually do to control inflation and what they are doing right now. Key rates are rising sharply in various countries. It was done in India too, and more will be done there. All countries, including America, are doing more or less the same thing.
A rise in the policy rate would influence aggregate demand if the interest rate is a market determinant. But, rate hikes would have little impact on the market due to caps on all types of loan rates.
Thus, if the key rate changes, it will have an effect on interbank transactions even if interest rates do not fall in the market. Other than that, it has signaling value. The signal is that if everyone thinks that commodity prices will rise a lot in the future, demand will increase immediately.
The central bank, by changing the policy rate, can now give a signal that it is monitoring the situation and that strict measures can be taken if necessary to control it.
Adjusting lending rates will give the quickest and most effective result in controlling domestic demand. It would not be fair to completely lift the interest rate ceiling, but it is possible to make it flexible. In this case, an interest rate range can be set.
One final thing to keep in mind is that there is absolutely no room for expansionary monetary policy until inflationary pressures have subsided. The difference between the growth of monetary expansion and the growth of gross domestic product (GDP) must not exceed the rate of inflation set in the budget.
If the estimate of GDP growth plus inflation exceeds the rate of monetary expansion, this could further fuel inflation.
Even when it comes to fiscal policy, there is no way the budget deficit can exceed the actual deficit this time around. Indeed, the tolerable limit of domestic demand has already been exceeded. In this case, a new deficit will cause this demand and increase inflation.
Nevertheless, I am not advocating a restrictive monetary policy by reducing the budget deficit.
We may not have the ability to take advantage of the ability to control inflation through the tax structure in revenue policy. Generally, if tax rates are increased, people’s disposable income decreases. Consequently, as demand decreases, inflation also decreases. If we want to increase disposable income, we must increase income tax. But here we see people asking for lower tax rates.
The government said it would reduce project expenditure to minimize the budget deficit. This will put pressure on the foreign exchange market, but will not reduce domestic demand. Spending on many projects leads to an increase in domestic demand. In this case, the cost of projects financed internally under the ADP will have to be reassessed.