Why the Central Bank Increases the Policy Rate

Bangladesh Bank has recently increased the policy rate in response to the ongoing economic crisis and persistently high inflation, which reached 9.89% in May. The central bank's primary objective is to reduce the money supply in the market as a measure to control inflation. It is widely recognized that increasing the interest rate is an effective tool to achieve this goal, as it makes borrowing more expensive and thus discourages excessive investment and spending.

By raising the policy rate from 8.00% to 8.50%, Bangladesh Bank aims to increase the cost of borrowing for commercial banks. Consequently, when commercial banks borrow from the central bank, they must now pay higher interest rates. In addition to the policy rate adjustment, Bangladesh Bank has also increased the Standing Deposit Facility (SDF) rate from 6.50% to 7.00% and the Standing Lending Facility (SLF) rate from 10.00% to 10.50%. 

Overall, these rate increases are designed to tighten monetary conditions, reduce inflationary pressures, and promote financial stability in Bangladesh during a period of economic challenge.