Occasional Paper: 82
Monetary policy is the process by which the central bank of a country controls the supply of money, the availability of money, and the cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Fiscal policy induced demand management approach as propagated by Keynes, which was popular in the postGreat Depression period, later made way to monetary policy led stabilisation approach in the period of high inflation of 1970s. While traditional fiscal policy solutions were useful in confronting unemployment by increasing spending and cutting taxes, counteracting inflation entailed reducing spending or raising taxes. The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilisation efforts may reflect both political and economic realities. Monetary and fiscal policies differ in the speed with which each takes effect as the time lags are variable. Monetary policy is flexible (rates can be changed each month) and emergency rate changes can be made, whereas changes in taxation take longer to organise and implement. Also, considerable time may pass between the decision to adopt a government spending programme and its implementation. During the period of Golden Growth covering late 1980s till the recent past, in the mix of macroeconomic policies, monetary policy continued to reserve a place of prominence. However, in the backdrop of global financial meltdown and subsequent confusion in macroeconomic theories, a new quest has emerged in redefining the role and instruments of macroeconomic policy in fostering economic development. It may be recalled that the main objectives of a classic monetary policy are to maintain a stable and low rate of inflation, high capacity utilisation to sustain a low rate of unemployment, and a high trend of economic growth and effective exchange rate management to maintain stability between exporters and consumers interest. Explicit articulation of monetary policy at the behest of an independent central bank ensures transparency in the economic policy making and has become popular in managing expectations of the major stakeholders. In Bangladesh, Monetary Policy Statement (MPS) was first issued by the Bangladesh Bank in January 2006. The intention was to present information on Bangladesh Bank's outlook on real sector and monetary developments over the immediate future and the monetary policy stance it will pursue, based on its assessment of the developments over the preceding period. In continuation to this tradition, on 19 July 2009, the eighth issue of half yearly Monetary Policy Statement was announced for JulyDecember, FY200910 period. The present analytical commentary sets off by providing a brief overview of evolution of monetary policy stances of the Bangladesh Bank as espoused in its recent policy statements. This has been followed by review of the macroeconomic objectives along with a catalogue of the monetary policy instruments deployed in Bangladesh. The paper then subsequently examines behaviour of the monetary aggregates in view of their targets and achievement. Excess liquidity and agriculture credit, the two major issues that should influence the monetary policy this year, has been discussed in the following section. A selected set of critical issues, but missing in the current MPS has been discussed at the penultimate section. The paper rounds up with a few concluding remarks on implementation of the MPS for the first half of the current fiscal year (FY200910).