Navigating Bangladesh's Monetary Policy: Analyzing Narrow Money Growth and Yield Discrepancies

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 20 Mar, 2024

M0 or narrow money growth as of February 2024 is 0.7% yoy. Without a doubt, this is a pretty contractionary monetary stance and therefore the treasury securities market reflects the tight liquidity situation. Let's look at the yields on a short-term and a long-term bond.

91-day t-bill yield: 11.35%
10-year bond yield: 12.15%

Now let's have a look at some other rates

Inflation: 9.81% (March 2024)
Repo Rate (Policy Rate): 8.00%
Corporate Lending Rate (As per BB Formula): 13.55%

Here is where things start to get confusing. If the treasury security yields are correct and reflect the market reality, then the policy rate and the lending rate are inconsistent. With this policy rate, any bank can borrow at 8% and invest in bills at 11.35%. And with risk-free yields at these levels, there is little reason to lend at 13.55%.

To solve this problem, the policy rate needs to get closer to the treasury yields. And lending rate needs to move away from the SMART formula and be market-determined. If that means the lending rate is getting too high then we can increase money supply growth moderately instead of 0%.

Tags:
Bangladesh, monetary policy, narrow money growth, treasury securities, inflation, interest rates, lending rates, economic analysis, finance, fiscal policy

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