Bangladesh g Economy y and Monetary Policy 2015 Biru Paksha Paul, PhD Chief Economist Bangladesh Bank
Today’ss roadmap Today Part P t A: A Banglade...
A time time-series series economic overview Global outlook Domestic sector External sector Price, Money, and financial sector Lessons for monetary policy?
J Jun-01 D Dec-01 J Jun-02 D Dec-02 J Jun-03 D Dec-03 J Jun-04 D Dec-04 J Jun-05 Dec-05 D J Jun-06 D Dec-06 J Jun-07 D Dec-07 Jun-08 J D Dec-08 J Jun-09 D Dec-09 J Jun-10 D Dec-10 J Jun-11 Dec-11 D J Jun-12 D Dec-12 J Jun-13 D Dec-13 Jun-14 J D Dec-14
Inflation is falling since end end-2011 2011. 12% 10%
N F d Non-Food Food
8%
General
6% 4% 2%
JJun-01 D Dec-01 JJun-02 D Dec-02 JJun-03 D Dec-03 JJun-04 D Dec-04 JJun-05 D Dec-05 JJun-06 D Dec-06 JJun-07 D Dec-07 JJun-08 D Dec-08 JJun-09 D Dec-09 JJun-10 D Dec-10 JJun-11 D Dec-11 JJun-12 D Dec-12 JJun-13 D Dec-13 JJun-14 D Dec-14
Lessons Liberalization contributed to growth acceleration and poverty reduction. BD’ss growth, inflation, exchange rates, and BD reserves are commendable in the region. BD exhibited hibit d highest hi h t amountt off stability t bilit in i inflation and growth in the region.
Lessons The interest rates are comparably high and unsustainable in a globalized economy. We have some space to increase our debt. Infrastructure, energy, and social peace are needed d d tto make k th the economy grow ffast. t
Monetary Policy What is monetary policy? Why is it needed? Objectives? How does it work? The Star Model What are the main points of the latest MP? How is it different in different economies? What did we learn and what should we do? BD Economy & Monetary Policy
Why is monetary policy important? Fiscal and monetary policy: two wings of the economy bird. You need to grow (growth) for earning good health (development) after ensuring normal blood pressure and temperature (inflation).
Monetary Policy Objectives Price stability is the main target of Monetary Policy. – Keynes (1923) ) p price stabilityy ((2% Dual Mandate ((USA): inflation) and maximum employment (94%). BD doesn doesn’tt have proper data on employment Dual Mandate (BD): moderate inflation (56%) d hi 6%)and high hb but sustainable i bl growth h (6 (6-8%). 8%) BD Economy & Monetary Policy
If expansionary monetary policy is taken: Interest rate falls => investment and consumption rise i => output and d growth h iincrease. Exchange rate falls => exports rise and imports fall => net exports rise => output and growth increase. Wages rise => inflation increases (monetary channel of inflation))
Why is monetary policy difficult? Although the relationship between growth and inflation is complex (positive, negative, g or zero), ) high g growth g is often associated with high inflation. Hence, Hence achieving high growth and low inflation is the most difficult task for monetary policy. li BD Economy & Monetary Policy
Is ggrowth inflationary? y Correlation over 1976-2014: No (-12% but insignificant) Correlation over 1990-2014: Yes (+45% and significant) 14 12 10 8 6 4 2 0
High inflation will erode growth If output rises => inflation rises => interest rate rises (Fisher) => investment and output p fall. If interest rate rises => exchange rate rises=> net exports and output falls falls. A parable of self destruction
Highlights of Monetary Policy Inflation target 6.5% and GDP growth target 6.56 8% by June 2015 6.8% Growth of reserve money at 15.9%, broad money 16.5%, 16 5% and d private i t credit dit 15 15.5% 5% Lending rates and the spread to be reduced Exchange rate stability and healthy foreign reserves Inclusive and green financing for sustainable growth BD Economy & Monetary Policy
