Monetary Policy of Bangladesh and Its Impact on Economy

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MONETARY POLICY OF BANGLADESH AND ITS IMPACT ON ECONOMY

Monetary policy is concerned with the measures taken to control the supply of money, the cost and availability of credit. Further, it also deals with the distribution of credit between the uses and the users, the lending and borrowing rates of the banks. In a developing country like ours the monetary policy has been effectively used as a tool for overcoming depression and inflation. As Prof R. Prebisch writes “The time has come to formulate a monetary policy which meets the requirement of economic developments which fit in to its framework perfectly.” Along with the economic growth the monetary policy has also to ensure price stability, as excessive inflation has an adverse distribution effect and hinders the economic development.

To understand the monetary policy of Bangladesh it is important to understand the objectives or goals, targets and instruments of monetary policy. The goals refer to the objective which may be price stability or economic growth. Whereas the targets refer to the variables such as supply of money, bank credits and interest rates. The instrument ate the changes in supply of currency, bank rates and other interest rates, open market operation, changes in reserve requirement, selective credit contras.

PRESENT MONETARY POLICY OF BANGLADESH:

The central bank of Bangladesh has actually followed a policy of restring growth rate of the economy. It is almost two years mow, that the central bank of Bangladesh has made a switch to a concretionary monetary policy. Bangladesh Bank is bit reluctant about admitting the term contractionary; it favours the term “causious”. It points out a reason, that there is no contruction in money or credit supply.

It this policy, Bangladesh Bank raise the reserve requirement as a result the deposits of banks contracts and availability of credit reduces and cost of credit increase as the interest rate rises. IMPACT OF MONETARY POLICY IN OUR ECONOMY

OBJECTIVES OF MONETARY POLICY ADOPTED BY BANGLADESH BANK:

1. Ensuring price stability or controlling inflation
2. Encouraging economic growth.
3. Ensuring exchange rate stability for taka. That the exchange rate of Tk. With dollar, euro and other foreign currency.

Let us explain the objectives below:

a) PRICE STABILITY OR CONTROL OF INFLATION:

Achieving price stability has remained the dominant objective of Bangladesh Bank. It may however be noted that price stability does not mean, there is absolutely no changes in price at all. In a developing country like ours where structural changes take places during the process of economic growth, some changes in the relative price do occur, that generally put upward pressure on price. Price stability means a reasonable rate of inflation.

The Bangladesh Bank expects to contain the rate of inflation between 6.85% and 6.95% in the current fiscal year 2006 and 2007 pursuing a cautious monetary policy.

A high degree of inflation has adverse effects on the economy. A high inflation raises the cost of living. Therefore it is described ad the no. 1 enemy of poor. Inflation makes exports costlier and people are induced to import good.

In contractionary monetary policy a rise in interest rate increase the cost of credit and reduce the money supply in the economy and thus control the inflation.

The main causes behind the high inflation in our country are draining out of money and artificial crisis create by some businessmen. Drain’ out occurs when any foreign country invest in our country and uses their own human and equipment resource. The gaining from the investment does not remain in our country and increase inflation. Artificial crisis is created as few businessmen stocks goods of inelastic demand and raises the price.

b) ENSURING ECONOMIC GROWTH:

Promoting economic growth is another important objective of monetary policy of Bangladesh. In the...
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