The era of easy money is not ending yet

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It is not the easy money supply but the increase in the price of oil that is attributed to the rise in inflation in a study carried out by the Bank of Bangladesh.

However, globally, central banks saw cheap funding as one of the main reasons for soaring inflation and decided to tighten monetary tools.

In the case of Bangladesh, the central bank still plans to continue the era of easy money.

Soaring oil prices are the underlying driver of inflation in Bangladesh, according to the study.

Even though inflation jumped to 6.05% in December, cheap money did not help, central bankers observed.

A 10% rise in oil prices will directly raise national inflation by 0.12 percentage points, according to the study.

The government raised diesel and kerosene prices by 23% in November last year.

This study attempted to measure the possible impact on inflation of the recent rise in oil prices in Bangladesh.

He found that following the rise in oil prices, fuel inflation and transport and communications inflation rose significantly, while headline inflation did not always rise as much.

The analysis revealed that the oil price impact is temporary as it has an immediate impact on inflation and disappears within three to nine months.

The indirect impact begins to appear immediately and gradually diminishes over the next nine months before completely disappearing, according to the study report which was presented at the meeting of the central bank‘s board of directors held on last month.

The heavy import has also contributed to inflation in the country as commodity prices rose sharply amid global inflation, a senior executive told Business Standard.

But the Bangladesh Bank is unwilling to rein in the imports led by the garment sector, which is a good sign for the country, he said.

For example, an opening of LC (letter of credit) for the import of capital goods increased by 32% in July-December of the current financial year, which was in negative territory at the same period of the year. last.

The textile sector saw the highest growth of 313% in the opening of LC for imports of machinery equipment during the period when the garment industry occupied the second position with a growth of 129%, according to the Bangladesh Bank data.

The LC’s high openness of the clothing sector contributed to an increase in overall import growth to 53% in July-December of the current fiscal year, which was only 7.52% in the current fiscal year. full year 21, according to central bank data.

Although imports are increasing, the central bank is rather concerned about food inflation in the coming months, as the rise in the price of diesel could increase the production costs of Boro paddy, which will fuel rice prices, fueling perhaps -possibly be food inflation, according to the study report.

Ensuring adequate supply of rice in the market and necessary measures taken by the government can solve the problem, according to the study report.

All types of interest rates fell to historic lows in 2020, thanks to loose monetary tools during the pandemic.

But the lending rate started to rise late last year as demand for credit surged as economic activity resumed.

Private sector credit growth returned to pre-pandemic levels in November, recording growth of 10.11%, which continued into December.

Although credit growth has increased, it remains well below the monetary target of 14.8% set for the current fiscal year, prompting the central bank to continue its expansionary monetary policy, said a senior official of the central bank.

The banking sector is still awash with huge excess liquidity of Tk2.16 lakh crore in December last year.

How the world’s central banks act to control inflation

The upward trend in inflation prompted the Bank of England to raise interest rates recently from 0.25% to 0.5%.

The bank expects inflation to peak at 7.25% in April once the energy price cap rises to 54%. This will be the highest inflation seen since the early 1990s.

Twelve emerging market rate setters raised interest rates in 2021.

Yet all eyes are on the Federal Reserve Bank of America. This is partly because they have a dominant role in the global financial system, but also because US inflation is high and the Fed is lagging behind. For months, he has stimulated an already boiling economy by buying bonds and keeping interest rates at 0-0.25%.

In the United States, consumer price inflation has reached 7%, according to The Economist’s latest report, “How Far Will Central Banks Go?”

The Federal Reserve is expected to raise rates by 1.75 percentage points in 2022, the most since 2005, according to Economist.

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