Bangladesh hikes repo, reverse repo rates to rein in soaring inflation

09:01, June 16, 2011      

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The central bank of Bangladesh Wednesday hiked repo and reverse repo rates -- the third attempt in about three months -- to rein in soaring inflation in the country largely related to food prices, an official said.

The Bangladesh Bank (BB) official who preferred to be unnamed told Xinhua that the central bank raised interest rate on repo to 6.75 percent, which was 6.25 percent earlier. The rate of interest on reverse repo, however, was surged by 0.25 percentage points to 4.75 percent, he added.

A repo rate is the rate at which banks borrow funds from a central bank to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend. On the other hand, the rate at which a central bank borrows money from the banks is termed the reverse repo rate. A central bank use this tool when it feels there is too much money floating in the banking system.

If the reverse repo or repo rate is increased, it means a central bank will borrow money from the banks and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with it instead of lending it out.

Consequently, banks would have lesser funds to lend to their customers. This helps a central bank to stem the flow of excess money into the economy.

Earlier, on April 26 this year the repo and reverse repo rates in Bangladesh were increased by 25 basis points, while on March 13, the rates saw a rise of 50 basis points.

The latest central bank move came just a week after the South Asian country's Finance Minister AMA Muhith in his budget proposal said, steps taken towards taming inflation in the monetary sector will be continuing in the medium and long term.

According to latest Bangladesh Bureau of Statistics (BBS) released data, the country's inflation rate leaped to 10.67 percent in April 2011, the highest spike since July 2008, pulled higher by spiking food prices in the country.

The BBS data showed that the country's food inflation grew at 14.36 percent in April, hitting a record on a point-to-point basis in the last three years, from 13.87 percent in March.

Price hike of food items particularly staple rice is a key concern for the country's government as nearly 40 percent of its over 150 million people live on less than two U.S. dollar a day and spend 70 percent of their income on food purchase.

Bangladesh's inflation rate recorded over 11 percent in November 2007, a 17-year high, due to shortage of food grain supply after two rounds of devastating floods and a super cyclone Sidr hit the country.

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