Monetary Policy in Bangladesh

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We are… Group No: 16

Name Id No:Gourav Roy 20-059Al-Amin Khandakar 20-019Pantho Sarker 20-033Shahriar Md. Lukman 20-047Mohammed Gulam Kibria 20-075

Group Figures

We are Presenting on…

Monetary Policy in Bangladesh

Now you are with…

Gourav Roy

Id No: 20-059

Impacts on capital Market

Impacts of Monetary Policy

on Inflation

Justification of the Monetary

Policies

Recent Monetary Policies by

Bangladesh Bank

The Bangladesh Experience of

Monetary Policy

A Justified and Brief

Recommendation

Challenges to Establish a sound Monetary Policy

The End

Topics to be Covered…

An Overview of Monetary

Policy

What is Monetary Policy?

Ensuring the Growth and Stability of Money Supply

Monetary Policy is a Process Dealing with

Maintaining the Optimum Cost of

Money

The Supply of Money

The Availability of Money

Developing Policies for Smoothing the Business Trends

Bangladesh Bank

History of Monetary Policy by TimelineChart to show the Dealings of Monetary Policy with Times

Early Period

Organization of Paper Money

Organization of Central Bank

Industrialization Period

“Jiaoji” originated in China at First as paper money

In 1870-1920, economy grew more critical and monetary policies became more

expanded

Stage 1 Stage 2 Stage 3 Stage 4

TI

MELINE

a) Decisions about coinage system

b) Decisions about money

In 5000 B.C.

The Bank of England in 1964 started officially the normal monetary policy

Present Stage

Stage 5

Types of Monetary Policy

ExpansionaryPolicy

Used to reach a targeted price level

Appropriate when, Inflation is imbalanced

Appropriate when, Economy and Inflation

Appropriate when, Recession and Unemployment

Types of Monetary policy

ContractionaryPolicy

Inflation Targeting

Price levelTargeting

Monetary Aggregates

Gold standard

Fixed Exchange Rate

This approach focuses on monetary quantitieswhich influence Central Bank’s reaction function

It’s a special type where the value of national currency is measured on the basis of the reserved gold by a country.

The policy is based on maintaining a fixed exchange rate with foreign currency.

Scopes of Monetary policy

Short term interest rates

Long term interest

rates

Velocity of money

through the economy

Exchange rates

Bonds and

Equities

Govt. Spendi

ng

Financial Derivativ

es

International Capital flows

Scopes of MP

http://en.wikipedia.org/wiki/Credit_quality

Equilibrium in the Money Market

Quantity ofMoney

InterestRate

0

Moneydemand

Quantity fixedby the Bangladesh Bank

Moneysupply

r2

M2dM d

r1

Equilibriuminterest

rate

Copyright © 2004 South-Western

E

The Tools of Monetary Policy (MP)

Interest rate controls

Credit controls

Lending to domestic

Banks

Reserve requirements

Secondary reserve

requirement

Cash reserve

requirement

Securities requirement

DirectPolicyTools

IndirectPolicyTools

Toolsof

MP

Open market

operations

Now you are with…SHAHRIAR MD. LUKMAN ID; 20-047

Transmission Mechanism of Monetary Policy

• The process through which monetary policy decisions affect the economy in general and the price level in particular.

Transmission Mechanism

Change in Official Interest

Rates

Affects Banks and Money

Market Interest Rates

Affects Expectations

Affects Asset Prices

Affects Saving and Investment

Decisions

Affects the Supply of Credit

Leads to Changes in Aggregate

Demand and Prices

Affects the Supply of Bank

Loans

Process of Transmissio

n Mechanism

Non Controlle

d Elements

• Changes in Risk Premium• Changes in Bank Capital• Changes in Global Economy• Changes in Fiscal Policy• Changes in Commodity

Prices

Transmission Mechanism of Monetary Policy

Fig: Transmission Mechanism of Monetary Policy

Repurchasing Securities worth

of TK 100 Million by Bangladesh

Bank

Expansionary Monetary

Policy

Fall in The Commercial Bank’s Cash

Rate

Peoples’ Borrowing and

Spending Increases

Aggregate Demand Rises

GDP Rises

Price Level Rises

Transmission Mechanism of Monetary Policy: Hypothetical Example

• Purchases Securities in the Open Market;

• Lowers the Central Bank’s Discount Rate;

• Lowers Reserve Requirements;


Policy

• Sells Securities in the Open Market;• Raises the Central Bank’s Discount

Rate;• Raise Reserve Requirements;

Contractionary Monetary

Policy

Impacts of Monetary Policy on Capital Markets

Interest Rate Rises

Interest Rate

Decreases

Increase in Bond Prices;

Higher Levels of Capital Investment;

Demand for Domestic Bonds Falls;

Decrease in Bond Prices;

Lower Levels of Capital Investment;

Make Domestic Bonds More Attractive;

Now you are with…

Md. Gulam kibria ID: 20-075

Impact of Monetary Policy on Inflation

• Purchases Securities in the Open Market;• Lowers the Central Bank’s Discount Rate;• Lowers Reserve Requirements;• Lowers Statutory Liquidity Requirements


Policy

• Sells Securities in the Open Market;• Raises the Central Bank’s Discount Rate;• Raises Reserve Requirements;• Raises Statutory Liquidity Requirements

Contractionary Monetary

Policy

Increase Money Supply

DecreaseMoneySupply

Increase consumer’s

Money to Spend

Deccrease consumer’s

Money to Spend

Increase Inflation

Rate

Decrease Inflation

Rate

Frameworks of Bangladesh’s Monetary Policy

Developments/Information GDP growth & Inflation Growth of monetary aggregates Liquidity Situation Short-term Interest Rates Foreign Reserves & Exchange Rates

Policy Decision

Based on market information and judgment of the policy makers

Instruments

Open market operations (Repo, Reverse Repo and BB bill auctions)

Variation in reserve ratios

Targets

1. Operating Target Reserve Money2. Intermediate Target Broad Monet Interest Rate

Goals

Moderate Inflation

Sustainable Growth

Now you are with…

Al-amin khandakar

Id No: 20-019

Monetary policy Analysis in Bangladesh (Internal sector):

2012 (July) 2013 (January) 2013(July) 2014(January)

7.50% 7.50%

7.00% 7.00%

Average Inflation


16.50%

17.70%

17.20%17.00%

Broad Money Growth


13.80%

16.10%15.50%

16.20%

Reserve Money Growth


7.75%

7.25% 7.25% 7.25%

Repo Rate

Monetary policy Analysis in Bangladesh (External Sector):

FY 11 FY12 FY 13 FY 14

42%

6% 11% 17%

Export Growth Rate

FY 11 FY12 FY 13 FY 14

52.10%

2.50% 0.80% 4.40%

Import Growth Rate (Shipment)

FY 11 FY12 FY 13 FY 14

6.00%

10.20%12.60%

-8.40%

Remittance Growth Rate

FY 11 FY12 FY 13 FY 14

74.20%

81.80%

77.80%

81.40%

Exchange Rate (Tk./USD)

Challenges of Establishing Balanced Monetary Policy in Bangladesh:

Challenges of Monetary

Policy

Non-Monetized Sector Non-

Banking Financial Institutio

n

Unorganized

Financial Market

Higher Liquidity

Black Money

Lack of Honesty

Lack of Integrated Interest

Rate Structure

Time Lag

Now you are with…

Pantho Sarker ID: 20-033

Bangladesh Bank’s Monetary Policy Stance (For the first half of the FY 2016)

BB’s aim is to achieve maximum economic growth with boosting investment using selective easing strategy and ensuring moderate inflation.

The success of monetary policy depends on the skillful interaction of these variables by Bangladesh Bank.


Macro Variables Projected figure (For FY 2016)

GDP Growth7%

CPI Inflation 6.2%

Urgent redressing of infrastructural and administrative deficiencies

Preserving political calm and

stability

Current Inflation rate

is 6.40%


Money Supply

BB has projected to increase the broad money (M2) at

15.6% rate

Reserve Money

BB has projected to increase reserve money at 15% rate

Policy Interest Rate (Repo,

Reserve Repo)

Remain unchanged, but easing will be considered after point-to-point headline

general inflation and core CPI inflation take a sustained declining trend.


This is a growth supportive monetary policy that promotes investments through the strategy of selective easing.

Commercial banks have been motivated and supported in extending loans to the productive and vulnerable sectors at lower interest rates.

Green projects and export promotion activities will also avail loan at a lower rate

BB’s policy is to reduce the fluctuation in the exchange rate as much as possible.

Use of Selective Easing Method

Exchange Rate

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Monetary Policy in Bangladesh

Economy & Finance