Bangladesh Bank is beginning to loosen monetary policy from an unusually favorable position on the currency front. Despite persistent inflation and deep strains in the banking system, the taka has been among the most stable currencies in South Asia and neighboring economies over the past year, while foreign exchange reserves have recovered sharply.
Yet that stability masks a more difficult domestic problem: cheaper money may end up financing the government rather than reviving private investment.
For nearly two years, Bangladesh’s central bank treated high interest rates as its primary weapon against persistent price pressures, raising its benchmark policy rate from 8.5% to 10%.
Last week, the central bank finally relented, trimming its policy rate by 50 basis points to 9.5%. The overnight Standing Lending Facility rate was dropped to 11%, while the deposit rate was kept steady at 7.5%.
This asymmetric adjustment reflects a delicate balancing act: how central bankers want to lower funding costs for distressed lenders without encouraging them to hoard excess cash with the regulator. Yet, in an economy constrained by structural bottlenecks and mounting bad debts, loosening monetary policy resembles pushing on a string.
The immediate impetus for easing is an alarming slowdown in private investment. Credit to private firms expanded by just 4.98% year-on-year in May, down from 7.17% twelve months earlier—a sluggish pace for a country aspiring to rapid industrialization.
In response, the central bank slashed its December private credit growth target to 6.8%. Meanwhile, public-sector credit surged by 20.78%, revealing that state borrowing has effectively become the primary engine of domestic credit creation.
Lowering central-bank funding costs is intended to reduce commercial lending rates and render stalled capital projects viable once again. However, the true impediment to expansion is not the price of money, but a dearth of viable corporate demand.
Bangladesh industry is visibly faltering. Large-scale manufacturing output shrank by 1.42% in the first ten months of the 2025-26 fiscal year, reversing a 6.97% expansion recorded during the same period a year prior.
Annual export growth stalled at a negligible 0.17%, while import letters of credit registered only modest gains. Crucially, monetary policy cannot fix infrastructure failures. Factories across the country endure chronic interruptions to gas and electricity supplies.
For a factory owner unable to run production lines reliably, a modest half-point reduction in borrowing costs does virtually nothing to alter prospective returns. The financial penalty of idle capacity, backup diesel generators, and missed export deadlines far outweighs minor savings on bank loans.
Furthermore, the domestic financial system is deeply fragmented. On paper, Bangladeshi banks sit on substantial aggregate liquidity, holding 3.28 lakh crore taka ($27 billion) in excess liquid assets at the end of May, including 16,373 crore taka ($1.33 billion) in surplus cash above mandatory reserves.
But this capital is concentrated in a handful of well-capitalized private institutions that lack credible corporate borrowers. Conversely, troubled state-owned and Islamic lenders face severe capital deficits and decaying balance sheets.
Aggregate liquidity masks deep institutional fragility, leaving weak banks incapable of extending productive credit regardless of central bank policy.
This fragmentation severely impairs monetary transmission. Non-performing loans climbed to roughly 5.89 lakh crore taka ($47.65 billion) by late March, exceeding 32% of total outstanding loans.
The World Bank estimated that the system’s capital-to-risk-weighted-assets ratio sank to negative 2.6% by the end of 2025. Lenders burdened by bad debts do not respond to policy cuts by funding new industrial ventures. Instead, they hoard capital, restrict lending to a narrow tier of safe blue-chip clients, or buy government securities.
High Treasury yields offer commercial banks a lucrative, risk-free shelter, effectively crowding out private firms exposed to volatile energy costs and sluggish consumer demand.
Inflation presents a secondary barrier to sustained monetary easing. Although headline inflation moderated to 9.16% in June from 9.42% in May, it remains well above the government’s target of 7.5%. With nominal wage growth trailing at 8.18%, households continue to suffer real income losses.
Much of the remaining inflationary pressure stems from non-food items, including elevated transport and service costs, which are largely immune to interest-rate tweaks. Simultaneously, underlying monetary indicators are flashing warning signals.
Broad money grew by 12.45% in May, reserve money rose 21.74%, and currency held outside the banking system jumped 18.92%. This surge in physical cash reflects a troubling loss of public trust in the banking system, further eroding the deposit base required for sustainable credit creation.
One factor working in the central bank’s favor is the remarkable stability of the taka.
According to Bangladesh Bank’s quarterly report, the currency depreciated by just 0.59% against the US dollar between March 2025 and March 2026, making it one of the most stable currencies among South Asian and neighboring economies. Only Cambodia performed slightly better, with its currency weakening by 0.44%.
The contrast with regional peers is striking. The Indian rupee depreciated by 8.94% over the period, the sharpest decline among the economies compared, while the Sri Lankan rupee lost 5.11%, the Philippine peso 3.70%, and the Indonesian rupiah 2.67%. The Chinese yuan, by contrast, appreciated by 5.14%, while the Pakistani rupee gained a modest 0.39%.
Bangladesh Bank officials attribute the taka’s relative stability to tighter monetary and foreign exchange management and the shift towards a more market-based exchange-rate regime. Bangladesh adopted the new regime in May last year as part of its commitments to the International Monetary Fund.
The dollar-taka exchange rate consequently remained within a narrow range of roughly 122 to 123 taka for much of the past year. That stability matters for monetary policy because a relatively steady currency helps contain imported inflation by limiting increases in the local-currency cost of fuel, food and industrial raw materials.
There are, however, signs that pressure is returning. Increased demand for foreign currency to settle import bills has pushed the dollar gradually higher in recent months. On August 4, the interbank exchange rate stood at 123.81 taka to the dollar, compared with 123.69 taka only a few days earlier, according to Bangladesh Bank data.
Bangladesh’s external balance nevertheless offers brief respite. Robust foreign remittances, which climbed by more than 30% to reach $35.59 billion over the past fiscal year, combined with stronger export earnings, have allowed the central bank to rebuild reserves and ease pressure on the taka.
Remittance inflows accelerated after the fall of the Awami League-led government in August 2024, strengthening Bangladesh Bank’s ability to accumulate foreign currency, according to central bank officials.
As of July 30, foreign exchange reserves measured under the IMF’s BPM6 methodology stood at $31.60 billion, up sharply from $24.86 billion at the same point last year. Gross foreign reserves had reached $37.58 billion, helping Bangladesh generate a $4 billion balance-of-payments surplus.
Nevertheless, international observers remain unconvinced. S&P Global Ratings recently revised Bangladesh’s sovereign credit outlook to negative, echoing an earlier precautionary move by Fitch in May.
Ratings agencies highlight the toxic combination of banking sector vulnerability, fiscal strain, energy vulnerability, and mounting political uncertainty. The relative stability of the taka and recovery in reserves provide the central bank with greater room to maneuver, but neither addresses the fundamental weaknesses preventing liquidity from reaching productive businesses.
Last Thursday’s modest rate cut provides temporary relief for prime corporate borrowers, but monetary easing alone cannot engineer an economic revival.
Unless the government curtails its own bank borrowing, decisively resolves the banking sector’s enormous mountain of non-performing loans and restores reliable energy supplies to factories, central bank rate cuts will merely circulate liquidity between commercial banks and the treasury, leaving the broader real economy stranded in the doldrums.
Faisal Mahmud is a Dhaka-based journalist.
