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Monday, January 21, 2013

Innovative policy by BB?

Bangladesh Bank bought about $648 million from commercial banks during 1 December 2012 to 16 January 2013 with the central bank's 30-day bills and Islamic bonds, instead of paying in cash. Paying in cash basically increases the cash liquidity position of banks, which may fuel inflation up, which is the logic of the central bank behind taking such decision. Definitely, this is an innovative policy!

Now, what is the other side of the coin? Extracting foreign currency from the market means that there will be a shortage of foreign currency, which may depreciate Taka against foreign currencies. If this works, then inflation will increase. (Obviously, Taka depreciation has positive impact on export and remittance earnings) Again, there was an opportunity that excess foreign currency in the market could appreciate Taka, which could help decline in inflation; so in a way, this innovative policy loses this opportunity.

BB should be more prudent while giving explanation for its policy choice. Based on the aforesaid stance, it seems that BB is more worried about exchange rate stabilization; it wants to continue to have a managed floating exchange rate regime without taking any risk for inflation prospects - which is not problem. Controlling inflation is a secondary goal in this particular case.

Report on the issue!       

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