Investor Presentaiton
Independent Review of
RBD
Bangladesh's Development
Monetary Policy for
a Pandemic-affected Economy
□ Monetary policy in the upcoming fiscal year will have to tackle the challenges posed by the
uncertainties caused by COVID-19, while at the same time reigning in the rising cost of
living which is harming the middle class and the poor.
➤ Such formidable feats must be performed in the backdrop of excess liquidity in the banking sector,
which will make this effort even more arduous.
Excess liquidity in the banking system may induce commercial banks to
behave in ways which may jeopardise the stability of the financial system and
make it difficult for the central bank to achieve its monetary policy goals.
➤ For example, banks may attempt to offset their losses from holding excess liquidity by giving out
risky loans which may lead to higher volume of NPLs, higher inflation, and the creation of asset
bubbles.
Excess liquidity in the banking system also weakens the interest-rate transmission
mechanism of monetary policy, making monetary policy less effective in fine-tuning
aggregate demand.
Moreover, when there is excess liquidity in the banking system, commercial banks may
perceive the opportunity cost of holding excess balances at the central bank to be low, and
hence be slow to act to reduce excess liquidity.
➤ As a result the central bank would find it more challenging to determine the ideal level of desired and
excess reserves.
CPD (2022): State of the Bangladesh Economy in FY2021-22 (Third Reading)
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