COXS BAZAR INTERNATIONAL UNIVERSITY

Monetary Policy of Bangladesh

Impacts & Implementations

INTRODUCTION
Positive Political & economic scenario represents the Good governance. Both the economic &

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political structures are interdependent. Good central governance can change both economic
and political aspects, as well as social aspects of a country.
With the consultation of Ministry of Finance, Bangladesh Bank sets the monetary policy
for the state. They do so by adjusting (increasing/decreasing) the money circulating in the
economy and placing up the interest rates. Bangladesh Bank sets the rate of interest for the
banking & non-banking financial institutions to borrow money from Bangladesh Bank. By
adjusting (increasing/decreasing) the interest rate, Bangladesh Bank controls the capacity of
the financial institutions to access the money. This in turn holds the financial institution's
capacity to afford credit to the business and customers.
How easily financial institutions can access to money lays out the credit line from banks to

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customers. The key mechanism to manipulate the monetary policy of the Bangladesh Bank is
the adjustments in the rate of interest. Banks are the mediator to turn around and distribute the
savings or costs to their borrowers. Lowering the interest rate for the financial institutions,
interest rate for the commercial and mass consumers also tends to decrease or vice versa. This
is because an adjustment to the interest rate makes it affordable or prohibitive for the financial
institutions to provide loans.
The rate of interest and the exchange rate of money cause an intense relationship. When
Bangladesh Bank injects more money into the economic system by minimizing the rate of
interest, makes the cost of borrowing discounted. The more money is circulated into the
economy, declines the value of money, the less each Taka worth. This results from goods
more affordable and an increase in exports, which helps in sustaining the growth of the
economy as well.
Moderate inflation and declining unemployment can be ensured by circulating a moderate
money flow throughout the economy, as it will keep the rate of interest at minimum level. But
the fact that should be checked in time to time, that the rate of rd
inflation should be moderated

Date of Submission: 23
1

May, 2016

and expected. Because too much money flowing into the economy causes an increase in price
level, which refers to more money is chasing fewer goods.
The formal objective of a monetary policy is to maintain a steady price level and turning
down unemployment. It can be either expansionary or contractionary. On one hand, the
Expansionary policy is the policy where the money is injected into the economic system faster
process than usual. On the other hand, contractionary policy is the policy where money is
injected into the economic system in a slower process than usual. Normally an expansionary
policy is applied in case of recession, to fight against high unemployment. In this scenario,
central bank lowers the rate of interest with a view to luring investors to expand business
activity in the economic system. Again, a contractionary policy is applied in case of high
inflation or unexpected inflation. In this scenario, central bank maximizes the rate of interest
to lower the inflation with a thought to avoiding distortions and deterioration of asset values.

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