Need for a coordinated effort to fight inflation

Inflation around the world spreads to a good number of goods and services. This is why the International Monetary Fund (IMF), in its latest World Economic Outlook (WEP) last week, warned that higher inflation would likely continue over the next few months before returning to low levels. ‘before the pandemic by mid-2022. The IMF said: “In most cases, the rise in inflation reflects mismatches between supply and demand linked to the pandemic and higher commodity prices relative to their low base. a year ago. ” The fund also said that in some emerging markets and developing economies, price pressures may persist due to rising food prices coupled with the lagged effects of rising oil prices. In some countries, the depreciation of the exchange rate also pushes up the prices of imported goods. The IMF predicts that the annual inflation rate in emerging and developing countries will reach 5.50 percent by the end of this year, up from 5.10 percent last year.

The IMF also provides country projections for inflation. For Bangladesh, the IMF has forecast that the average annual inflation rate could rise to 5.70 percent in the current fiscal year (FY22) against the country’s government target of 5. 30 percent. The IMF also forecast that inflation at the end of the year would be 5.80 percent, which is the monthly rate. In the last fiscal year, the average annual inflation rate stood at 5.56 percent against the annual target of 5.40 percent in terms of the Consumer Price Index (CPI). Over the past two years, the annual inflation rate has hovered below 6.0 percent in the country.

By having an inflation rate below 6.0 percent, policymakers are in their comfort zone when it comes to the price situation. The official inflation rate, however, does not always reflect reality, mainly due to the distribution of weights in the CPI. The current price situation can be an example in this regard. The prices of basic necessities have been gradually increasing over the past few months. Nonetheless, inflation in July fell to 5.36 percent from 5.64 percent in June of this year. As the price situation worsened further, the inflation rate rose to 5.54 percent in August. The official inflation figure for September has yet to be released. On an average annual basis, the inflation rate was slightly above 5.50 percent in the first two months – July and August – of the current fiscal year.

It is not clear whether the upward trend in inflation is of concern to the country’s monetary authority, the Bangladesh Bank to be precise. The central bank has so far taken no action to curb inflationary pressure. There is no rise in rates when the money supply has increased significantly and has driven down interest rates. The average bank deposit rate has already fallen below 4.50 percent and if the current trend continues it is likely to fall below 4.0 percent. The average deposit rate is much lower than the average inflation rate, indicating that the purchasing power of people on fixed incomes has eroded considerably and their real income is turning negative.

The Bangladesh Bank cut repo and reverse repo rates to 4.75 and 4.00 percent respectively in July last year as part of an eased monetary policy. “Following an accommodating monetary policy, the interbank call rate has shown a downward trend since September 2020. As a result, the weighted average call rate on the interbank money market now oscillates below the Repo and Repo Repo corridor at 1.85% until September 26 of fiscal 22; which indicates sufficient liquidity in the money market “, indicates the last monthly report of the central bank on the principal economic indicators.

The pursuit of the easy money policy to support sectors and businesses affected by the pandemic and also to support the resumption of economic growth now requires reconsideration when inflation is hurting people a lot. Additionally, the depreciation of the local currency or taka against the US dollar has made imports more expensive, although recipients of exports and people who receive remittances receive more in local currencies. The taka-dollar exchange rate increased on average to 85.20 Tk in August from 84.80 Tk in July to the dollar. It further increased to 85.60 Tk during the second week of October. However, the “partially managed” floating exchange rate mechanism offers the central bank the possibility of intervening on the foreign exchange market from time to time.

The central bank apparently faces a difficult choice to maintain a reasonable balance between inflation and growth. The accommodative monetary policy helped boost aggregate demand and boost consumer spending. At the same time, inflationary pressure is intensifying due to a mixture of growing demand and rising costs. A rate hike could help ease inflationary pressures to some extent in the near future. Already, yields on treasury bills and bonds have started to rise in the money market.

Other factors such as additional costs in the supply chain require administrative measures to contain the upward trend in inflation, especially food inflation. The official figure, released by the Bangladesh Bureau of Statistics (BBS) showed food inflation edged up to 5.16 percent in August from 5.08 percent in July. Non-food inflation, however, rose sharply to 6.13 percent in August from 5.80 percent in July this year. We have to wait for the release of the BBS data to see what the September inflation figure would come to.

Despite the official figure, the prices of basic necessities and food products have increased. The long lines of low-income people to buy rice and food items in TCB trucks are getting longer every day. The government previously reduced rice import tariffs to 25 percent from 62.50 percent. But it had little impact on the rice market. Now he has reduced tariffs on the importation of onions and sugar. By reducing tariffs, the government has recognized the problem of persistently rising prices. Measures in other areas, for example a rate hike by the central bank, must also be taken to reflect the government’s recognition of the situation.

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