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Understanding Bangladesh's Recent Interest Rate Hikes: Impact on Borrowing Costs and Treasury Yields

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 26 Sep, 2024

Today, central bank increased policy interest rate (repo rate) by 50 bps. Since taking charge of BB, Mr Ahsan Mansur has made two quick rate hikes amounting to 100bps cumulatively. In addition, he has guided that its very likely that another 50bps hike will come.

Naturally, news media interprets this as translating to high borrowing cost for corporates and higher treasury yields. However the reality is quite different.

Anyone following the bond market will note that yields across all tenors has been coming down for some time. In June 2024, 91D bills yielded 11.65%. This week this yield dropped to 11.48%. In between the two periods policy rates went up by 100bps.

This seemingly surprising behavior has a simple explanation and I wrote about this before. Back in June 2024, the spread between the repo rate and 91d bill was 315bps. This was a ridiculously high spread which was only due to not using interest rate targetting and also setting the policy rate too low.

Today, with the policy rate at 9.5% the spread has narrowed to 198bps. By all probabilities we will see further reduction in this spread in the near future. I am too lazy to draw a chart but a chart of 91d yield and repo rate will perfectly explain this.

Beyond the spread reduction we also feel that banks have changed their expectations of future inflation rates based on the statements of the new BB governor. Government has also communicated its intent to reduce expenditure and thus reduce borrowing from domestic sources.

Therefore, the conclusion here is that policy rate hikes all the way till 11% will have barely any impact on either lending rates or treasury yields. Once Bangladesh moves to interest rate targetting movements in policy rate will closely mirror the other two.

p.s. Another way to interpret this is saying that the rates hikes were more than priced in by the market.