Global commodity price hikes may jeopardise inflation target: BB

Bangladesh Bank's monetary policy review

• Driven by the non-food component, the headline CPI inflation goes up to 6.05% in December 2021

• Twelve-month average CPI inflation creeps up to 5.55% in December 2021 – slightly higher than the 5.30% target set for FY22

• The price pressure likely to continue for some time 

• The robust import growth on top of recent moderation in growth inward remittance growth may create unfavourable position in the balance of payments

Bangladesh's economy has experienced a strong rebound from the pandemic-induced downturn, but the recent spikes in global commodity prices – aided by unfolding geopolitical conflicts – may create price pressure for the country, causing the government to miss its inflation target, observes the Bangladesh Bank.

In its monetary policy review 2021, released on Wednesday, the central bank also addressed a number of risks, including negative pressure on the balance of payment amid high imports and the severity of the ongoing pandemic, which may cast a cloud over the growth prospects.

The Bangladesh Bank, however, hinted at continuing with the current expansionary and accommodative monetary stance when other global central banks are opting for squeezing money supply to curb inflation.

"The recent global commodity price hikes amid unfolding geopolitical conflicts may exert some inflationary pressures in the coming days, making it difficult to maintain the CPI inflation within the target set for FY22," says the review report.

"Driven by the non-food component, the headline CPI inflation exhibited an upward trend in H1 FY22, reaching 6.05% (point to point) in December 2021, due mainly to the pass-through of elevated global commodity prices in the face of supply shocks, higher shipping cost, and the knock-on effect of a recent upward adjustment of fuel (diesel and kerosene) price in the domestic market."

Headline inflation is the raw inflation figure reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labour Statistics. The CPI calculates the cost to purchase a fixed basket of goods as a way of determining how much inflation is occurring in the broad economy.

"Similarly, twelve-month average CPI inflation crept up to 5.55% in December 2021 – slightly higher than the target of 5.30% for FY22.

"It is expected that price pressure may continue for some time and is likely to miss the target set for FY22," the report states.

The robust import growth on top of the recent moderation in the growth of inward remittance may create an unfavourable position in the balance of payments, it says.

The current account (CA) balance recorded a sizeable deficit of $8.2 billion in the first half of the current fiscal year against a surplus of $3.52 billion in the corresponding period of the previous year owing to a decline in remittance inflows and a widening trade balance in face of a faster rise in import payments than export receipts, according to the report.

Notwithstanding a growing surplus in the financial account, the overall balance posted a deficit of $1.8 billion, creating a depreciating pressure on the exchange rate during this period.

The central bank's official foreign exchange reserve stood at $46.2 billion at the end of December 2021, which is equivalent to prospective import payments of 5.6 months.

Addressing the credit demand, the review report says the growth in credit flows to the private sector continued to gain momentum, reaching 10.68% at the end of H1 FY22, aided by recovery of aggregate demand on the one hand and overall low cost of credit on the other.

A rise in private credit growth and the Bangladesh Bank's mop-up measures to rationalise liquidity in the banking system together raised interest rates in the interbank market.

In contrast, the interest rates in the retail market remained moderate.

The central bank in its review report has observed a strong recovery of the country's economy.

"Despite decelerated and uneven global economic recovery trends, Bangladesh economy exerted a strong rebound with 6.94% real GDP growth in FY21 after the economic fallout from the Covid-19 pandemic, aided by well-coordinated monetary and fiscal policy supports, better management of the pandemic situation, and an upbeat of business confidence.

"The speed of this recovery appeared to have strengthened further in H1 FY22, despite the outbreak of the Omicron variant of Covid-19, reflected in a surge in import and export demand, a peak up in private credit demand, and a strong growth of large and medium scale manufacturing output."

Amid the falling rate of Covid-19 infections, ongoing extended vaccination programme, the continuation of growth-supportive fiscal and monetary measures, along with solid growths in imports and exports, are expected to help strengthen economic recovery further in attaining the real GDP growth of 7.2%, a target set for FY22, the report says.