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Sunday, June 29, 2014

Response on Raising CRR!

Professor M.A. Taslim writes on the impact of raising CRR.

The link of the article.

Main messages came out from the article are as follows:

1. the ultimate loser of raising CRR will be the ordinary people, who have regular transactions with commercial banks;
2. This attempt of the central bank will raise the interest rate up;
3. While the main job of the central bank should be to target nonfood inflation, it now wrongly  targets food inflation also. Probably, the central bank is misguided with using its policy instruments;
4. Without improving the investment climate, which is the pressing need of the economy at this moment, the current trend of ever-increasing excess liquidity of the banking system can't be stopped.

One more issue that the article couldn't cover: If one carefully plots a graph with historical data (year-on-year change) of net credit to the government and credit to the private sector, they will see the long-term trend of negative relationship, including recently. While Bangladesh Bank has been trying to discourage the government to borrow from BB's own funds, basically to avoid inflation threats, then raising CRR at this time will definitely open another door of crowding out of private investment funds. So, the central bank needs more thoughtful/innovative steps.   

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