Bangladesh Bank is likely to continue with the same monetary policy in the second half of the fiscal year due to emergence of some fresh risks.
The risks include the bullish trend in the stockmarket and the rise in default loans.
Though there is a pressure on the central bank for raising the credit growth target to boost investment, there will not be any major change in the next monetary policy statement to be released today, said a BB official.
Besides, the credit growth target set in the monetary policy for the first half of the year is yet to be achieved. As a result, it will remain the same at 16.5 percent.
On June 30 last year, private-sector credit grew 16.78 percent, but in November of the same year, it declined to 15.01 percent.
The government has not been borrowing from the banking system now, so the private sector may use the space fully, the BB official added.
The monetary programme targets need to maintain continuity while becoming a little more ambitious on reducing the inflation target to around 5.5 percent instead of the original 5.8 percent, said Zahid Hussain, lead economist of the World Bank's Dhaka office.
“To reach the new target, the monetary programme may need at best some minor adjustments,” he added.
Inflation in December came down to 5.52 percent whereas the government's target for the whole fiscal year is 5.8 percent. As a result, the central bank has room to entertain some expansionary measures in the monetary policy.
Not just expansionary measures, other factors need to come into play concurrently for investment to rise, according to the BB official.
In this situation, if an expansionary route is taken there is a risk of default loans rising further, he added.
In September last year, default loans accounted for 10.34 percent of the total outstanding loans, up from 10.06 percent in June that year.
Another risk factor is unnecessary credit entering the share market and creating a bubble. In about four months, Dhaka stocks jumped up about 25 percent.
On the other hand, the market capital to GDP ratio increased around 21 percent.
In the new monetary policy, attention will be given to maintaining vibrancy in the stockmarket.
On the other hand, the central bank will remain alert so that there is no repeat of the stockmarket bubble of 2010.
The share market has recently risen beyond what can be expected based on the fundamentals, Hussain said.
“We expect to see a diagnosis of the share price trends in the MPS and moral suasion to prevent herd behaviour that could end up hurting the small investors in particular.”
Hussain said the BB should address the wide disparity in exchange rates found in the official and kerb market as well as the persistence of the non-performing loan problem in the upcoming monetary policy.
“The MPS should tell us what new thinking, if any, the BB has to address the persistence of the NPL problem in the banking sector. Clearly, business as usual is not helping.”
Given these problems, it is critical that the BB refrains from making the monetary programme unnecessarily expansionary relative to the programme announced last July, Hussain added.