Bangladesh Bank has decided to keep its key policy interest rate unchanged as inflation risks, despite recent easing, remain significant.

In its latest quarterly Monetary Policy Statement (MPS) for the October–December 2026 period, the central bank maintained the repo rate at 9.50% while deciding to observe the evolving economic situation with a cautious stance.

The announcement was made on Wednesday (September 30) at Bangladesh Bank's headquarters by deputy governor Habibur Rahman, with senior officials in attendance.

Rahman noted that the decision to hold rates steady was taken during the 14th meeting of the Monetary Policy Committee (MPC) on September 23.

Alongside the benchmark rate, the Standing Lending Facility (SLF) rate remains at 11.00%, while the Standing Deposit Facility (SDF) rate stands at 7.50%.

According to the central bank’s assessment, although overall inflation has declined recently, there is insufficient evidence to confirm long-term stabilization.

Continued inflationary pressures are posed by factors such as rising global energy prices, supply disruptions in the Strait of Hormuz, upward adjustments in domestic administered energy tariffs, and the potential implementation of a new pay scale.

The central bank warned that premature monetary easing could unanchor inflation expectations and prolong the timeline required to achieve target levels.

Overall headline inflation dropped to 8.26% in August 2026 from 9.16% in June, marking a 10-month low. This decrease was driven mainly by a decline in food inflation to 7.02%.

However, non-food inflation remained elevated at 9.32%, keeping household costs for essential items and services high.

Rising energy prices are expected to drive up transport and production costs, while the partial implementation of the national pay scale could introduce further upward pressure.

Economic activity remains under strain, with real GDP growth for FY26 estimated at 4.14%. However, growth in the third quarter slowed sharply to 2.2%, accompanied by a 0.28% contraction in industrial production.

Key indicators—including industrial manufacturing, power generation, fuel supply, and private sector credit—point to sluggish momentum in the past fiscal year, despite modest signs of recovery in the first quarter of fiscal year 2027.

Growth continues to face hurdles from high borrowing costs, energy shortages, infrastructure bottlenecks, and persistent demand uncertainties.

To reinvigorate economic activity, Bangladesh Bank highlighted stimulus measures totaling Tk60,000 crore, which includes a Tk20,000 crore package dedicated to restarting closed industrial units. Additionally, refinancing schemes have been directed toward agriculture, micro, cottage, small, and medium enterprises (CMSMEs), and export diversification.

The central bank emphasized that monetary policy alone cannot resolve supply-side constraints, calling for structural reforms alongside financial support to boost investment and output.

Financial markets experienced mild relief following a 50-basis-point reduction in the policy rate to 9.50% on August 2, which resulted in lower interbank rates and government security yields.

However, credit demand remains muted. Private sector credit growth fell to just 4.75% in August 2026, constrained by investment sluggishness, high borrower risk, and banking sector vulnerabilities.

Meanwhile, non-performing loans (NPLs) rose to 32.78% of total loans by June 2026.

The central bank underscored the urgency of bank restructuring, governance enforcement, capital recovery, and strict credit discipline.

The country’s external balance improved significantly in FY26, concluding the period with a Balance of Payments (BoP) surplus of $6.6 billion.

However, the first two months of FY27 recorded an overall deficit, largely due to shortfalls in the financial account.

Remittances provided a crucial cushion, surging by 18.90% during the period. Relative stability in the foreign exchange market also helped contain imported inflation.

Bangladesh Bank has indicated that the country’s economic recovery is expected to be slow and gradual, rather than a rapid turnaround.

Growth projections from various multilateral institutions show divergent forecasts.

While inflation is expected to moderate over the coming fiscal year, the pace of deceleration remains uncertain due to overlapping global and domestic risks.

Key headwinds include ongoing Middle East tensions, elevated global fuel and fertilizer prices, tight global monetary conditions, domestic energy constraints, fiscal pressures, and structural banking system weaknesses.

Bangladesh Bank stated that its core task is supporting economic recovery without derailing inflation control.

Future decisions will rely heavily on incoming data, focusing on targeted credit programs, structural reforms, financial sector reinforcement, and maintaining managed exchange rate flexibility to secure sustainable long-term recovery.

Why it matters

Maintaining the benchmark interest rate signals the central bank's cautious approach to balancing economic recovery efforts against ongoing inflation pressures.