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Friday, September 2, 2011

Wrong monetary policy of BB?

Well, according to this news link of the Financial Express, inflationary pressures will persist in the Bangladesh economy due to wrong monetary policies taken by the central bank, Bangladesh Bank (BB) (in the Monetary Policy Statement (MPS)), as noted in its latest Bangladesh Economic Update (BEU) of 'Unnayan Onneshan', a non-government research organisation.

As explained in BEU, there are two factors that has been driving the current phase of inflation: (i) quick transmission of international prices into domestic prices; (ii) weak public distribution system. On the misguide of MPS, the policy rate hike will increase the cost of production, thus will dampen investment, which may fuel the price at further level in future. Good explanation!

Here is the news link.

Here is the link of Bangladesh Economic Update of 'Unnayan Onneshan'

In my view, the explanation is partly right. While the central bank has been assuming the demand side pressures to control price level while setting its policy rates, which is partly true; the BEU considered supply side factors as the sole explanation of the problem. This is true that supply side factors outweighs those from demand side, however the central bank is simply can't sit independent without interfering in the money market. The facts should be remembered are: (i) money supply growth is so high (in fact doesn't match with the great MV=PY theory!); (ii) huge excess liquidity; and (iii) unproductive use of money. Though the reasons for inflation are the same in China and India as in Bangladesh, please look at their policy decisions; they are more aggressive (or, restrictive) while conducting their monetary policies. I am not pretending that BB is doing a good and appropriate job in controlling inflation; however, I am just defending its position.

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