The Bank of Bangladesh decided yesterday to wipe out excess liquidity as it hits banks, savers and small borrowers and threatens to create instability in the economy through asset bubbles.
As part of the intervention, the central bank will revive the BB Bill, an instrument last used in March 2018, to allow lenders to invest rough capital.
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Bankers hailed the central bank’s move, saying it would help effectively reduce the surplus.
The initiative will also breathe new life into depositors whose incomes have been hit by a lack of an expected investment rate due to a negative return on savings.
The program will hardly send the lending rate higher, given a large amount of excess liquidity available in the banking system.
The first auction of “Bill Bank Bangladesh” will take place on August 9. A total of 9 auctions will be held throughout this month.
BB has approached all banks and non-bank financial institutions, saying the initiative will help control excess liquidity.
“This will also keep the money market stable,” he said.
The excess liquidity in the banking system amounted to 231,462 sq.m. Turks in June, up 66% year-on-year and 9% a month earlier.
The capital surplus has been on the rise since March last year, as the central bank took various measures to bring money into the market to offset the slowdown in business caused by the coronavirus pandemic.
However, the move has not been able to revive private sector credit growth as the pandemic has not yet been brought under control.
Credit growth in the private sector stood at 8.40 percent in the previous financial year against the central bank’s target of 14.80 percent. In this context, a massive capital injection into the market has made money cheaper than ever, lowering the deposit rate.
A BB official said the central bank had taken the initiative under its latest monetary policy, which showed the withdrawal of surplus funds in phases.
The central bank introduced an “expansionary and facilitative” monetary policy on July 29, with the aim of keeping available funds for the productive sector and restricting its flow to non-productive sectors such as the stock market and the housing sector.
Taking in unnecessary cash will also help the central bank curb inflation. It has failed to keep inflation within the target over the last financial year.
The central bank usually raises money using three instruments: the BB Bill, the reverse repo (repurchase agreement) and the cash reserve ratio (CRR).
There are three categories of BB account based on their expiration: 7 days, 14 days and 30 days. BB will arrange auctions for the three types of account.
Mirza Elias Uddin Ahmed, CEO of Jamuna Bank, said: “This is a move that suits time, as some banks are looking forward to it.”
The interest rate on the BB account ranged from 2.97 to 2.98% in March 2018, when the central bank conducted the last auctions.
However, the interest rate can become a significant factor as the current 91-day government bond rate is 0.55%, Ahmed said.
The interest rate on the BB account is usually slightly higher than the 91-day bond, an instrument through which the government borrows money from the banking sector.
Although the interest rate is set by the auctions, the central bank plays an important role in raising the interest rate.
If the central bank accepts a significant number of offers, the return on the instrument will automatically increase, Ahmed said.
“This will encourage many banks to participate in the auctions,” he said.
He also suggested that the central bank reopen the reverse repo, which has been suspended since November 2015.
The reverse repurchase rate is the rate at which a central bank borrows funds from banks to compress the money supply in the market.
BB officials say the reverse repo rate is very high compared to interest rates on deposit products offered by banks.
The reverse repurchase window will allow banks to invest 4% capital in the central bank overnight.
Many banks now offer interest rates between 2 and 3 percent on their fixed deposit (FDR) receipts. Therefore, the reopening of the reverse repo is not sustainable at the moment, said a central banker.
But Ahmed of Jamuna Bank said the central bank should reopen the window by reducing interest rates to around 2 percent.
Syed Mahbubur Rahman, CEO of Mutual Trust Bank, told Ahmed that BB could consider reopening the reverse repo.
Assessing the central bank’s move, he said banks would be more interested in investing in BB Bill if they raised a significant interest rate.
Ahsan H Mansur, executive director of the Bangladesh Political Research Institute, said the central bank should wipe out at least 33,000 Tk immediately in order to stabilize the money market.
The withdrawal of excess liquidity will not create any obstacles for the BB to pursue expansionary monetary policy, he said.
Small savers will benefit from the program as deposit rates rise in line with the reduction of excess liquidity, said Mansur, also a former International Monetary Policy official.
The withdrawal of funds will not have an adverse effect on the lending rate as it does not require such a large amount of extra money to implement the expansionary monetary policy, he said.
“However, the central bank must closely monitor the money market so that banks can not handle the lending rate under the pretext of withdrawing excess capital.”
“We have to keep in mind that the surplus of capital is invested in the capital market, where a bubble has already been created. Such a bubble must be contained at all costs, otherwise it will create instability in some sectors of the macroeconomy.”