In the realm of monetary policy, understanding the mechanics of the policy rate, along with the repo and reverse repo rates, is essential. In Bangladesh, the Bangladesh Bank Repo Rate is often referred to as the policy rate, playing a pivotal role in the country's monetary strategy.
Before understanding the policy rate, it's important to grasp the concepts of the repo rate and the reverse repo rate:
Repo Rate: This is the rate at which commercial banks borrow money from the Bangladesh Bank by selling securities to the central bank. Essentially, it is the cost of borrowing for banks, with the central bank acting as the lender of last resort.
Reverse Repo Rate: Conversely, this is the rate at which the Bangladesh Bank borrows money from commercial banks, using securities as collateral. This mechanism allows the central bank to absorb excess liquidity from the banking system.
In Bangladesh, the policy rate, also known as the Bangladesh Bank Repo Rate, is a critical tool in monetary policy. It serves as the base rate within the interest rate corridor, which is a range set by the central bank to guide short-term interest rates in the economy.
There are two primary types of monetary policy employed by the Bangladesh Bank:
Expansionary Monetary Policy: When the central bank aims to economic growth, it adopts an expansionary monetary policy. it expands the money supply in the market by lowering interest rates.
Contractionary Monetary Policy: To curb inflation and stabilize the economy, the central bank may opt for a contractionary monetary policy. This entails raising the policy rate to reduce the money supply, discouraging excessive borrowing and spending.
The Interest Rate Corridor: The interest rate corridor is an inevitable part of monetary policy. It defines the range between the lower and upper limits of interest rates, guiding the short-term rates in the economy. Here's how it is structured in Bangladesh:
Standing Deposit Facility (SDF): 7.00%
Policy Rate (Base Rate): 8.50%
Standing Lending Facility (SLF): 10.00%
The policy rate, considered the base rate, is calculated by adjusting 150 basis points (or 1.5%) above and below:
SDF Rate: Policy Rate - 1.50% = 8.50% - 1.50% = 7.00%
SLF Rate: Policy Rate + 1.50% = 8.50% + 1.50% = 10.00%
Another crucial aim of the policy rate is to keep the call money rate, which is the rate at which banks borrow and lend to each other on an overnight basis, which is currently stands as 9.18%.
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