The central bank will raise the cash reserve requirement for banks in a bid to contain inflation.
Bangladesh Bank (BB) is expected to issue a circular to different commercial banks today. With the new directive out, CRR (cash reserve ratio) will rise by 0.5 percentage point to 5.5 percent.
The new decision comes after a gap of more than four years. Earlier on October 1, 2005, the ratio increased by 0.5 percentage point to 5 percent.
The reserve requirement is a central bank regulation that sets the minimum reserves each bank must hold against customer deposits. The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country's economy, borrowing and interest rates.
A central bank official elaborates that any rise in CRR means mopping up excess liquidity from the money market by using the instrument as part of demand management to curb inflation.
Economists and businessmen think the new step will make the businessmen's access to bank finance difficult. It will also sag the investment that has shown signs of a pickup.
Bangladesh Bank Governor Atiur Rahman had earlier indicated that this measure would be meant to contain inflation.
"It's true that the private sector will be a bit unhappy. Still, we are doing it because we have to check inflation." He termed the rise nominal.
Rahman said: "The private sector credit has increased much. To cut it a little we're going to take this step so that inflation remains within the government target of 6.5 percent on average."
BB's weekly selected indicator shows a 13.80 percent rise in private sector credit during July-February of the current fiscal year. It was 9.13 percent in the same period a year ago.
The inflation, which was showing downward trend in the months before this government assumed power, stood at 2.25 percent in June 2009. But in February 2010 it increased to 9.06 percent.
Such upward trend continues every month, although the government has fixed a target of keeping inflation within 6.5 percent on an average.
The central bank officials think the CRR rise will result in a substantial fall in excess liquidity in the money market.
According to the BB monthly economic update, excess liquidity was Tk 32,515 crore at the end of March. However, BB sources said the amount of actual cash excess liquidity is less than Tk 4,000 crore, which will drop below Tk 2,000 crore due to the latest increase in the CRR.
Zaid Bakht, research director of the Bangladesh Institute of Development Studies, said, "There is huge excess liquidity in the market. So I don't see any need to increase CRR to contain inflation. Actually it is a contractionary monetary policy, which will make loans for businessmen difficult."
The surge in inflation is a result of the hike in commodity prices in international market, Bakht said, pointing out that the rise in credit has no relation with the increasing inflation.
He said investment has started picking up which may be adversely affected by the central bank decision. Besides, the BIDS official said, investors' import costs will go up.
Abul Kasem Khan, president of Dhaka Chamber of Commerce and Industry, also thinks that the BB step will squeeze the loan accessibility for businessmen. "The central bank should look how the cost of doing business is reduced."
He suggested the BB take steps to keep the lending rate below 11 percent.
