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Central banks across the globe prioritize controlling inflation, which occurs when overall price levels in an economy rise. In Bangladesh, inflation has become a pressing concern in recent years. The previous political administration failed to manage inflation effectively, leaving the economy still grappling with high price levels. As a result, Bangladesh Bank (BB) is currently reconsidering its monetary policy framework.

According to the Bangladesh Bureau of Statistics (BBS), inflation stood at 8.48% in June 2025. Food inflation for the same month was recorded at 7.39%, giving some hope for better inflation management. The current governor of Bangladesh Bank expressed satisfaction with the latest inflation figures. Upon assuming office, he adopted a contractionary monetary stance, aimed at containing inflation by raising the policy rate. Since May 2022, the policy rate has been increased eleven times, with the most recent adjustment made in October 2024. Presently, the policy rate in Bangladesh stands at 10%—significantly higher than other South Asian economies, excluding Pakistan. For comparison, India’s policy rate is 5.5%, Nepal’s 6.5%, Bhutan’s 6.38%, the Maldives 4.0%, and Vietnam—Bangladesh’s key export competitor—4.5%.

The flow of money within the economy is directly influenced by the central bank’s policy rate. Bangladesh Bank is preparing to unveil its half-yearly monetary policy for the July–December 2025 period. Entrepreneurs, industrialists, and startup founders are eagerly anticipating a more accommodative policy. High interest rates increase the cost of doing business, discouraging investment and economic activity. This is especially concerning in a country like Bangladesh, where the private sector drives the majority of GDP growth. Alarmingly, private sector credit growth in February 2025 fell to 6.82%—a 21-year low—indicating a stagnation in private economic activity. In contrast, the rate was 9.84% in June 2024.

The private sector plays a vital role in employment and poverty reduction. For example, Bangladesh’s garment industry employs around four million people, the majority of whom are women. However, the country is now witnessing a rise in unemployment. When an economy faces rising unemployment, sluggish GDP growth, and persistent inflation, it enters a state of stagnation. The current unemployment rate stands at 4.63%, slightly higher than before. In such a scenario, only an expansionary monetary policy—one that increases the money supply—can effectively stimulate job creation and boost economic activity. The central bank must consider shifting away from a contractionary stance in light of prevailing economic conditions.

The upcoming monetary policy should still include measures to control inflation, but it would be unwise to maintain the current 10% policy rate. It’s important to recognize that monetary policy alone cannot control inflation. Coordinated efforts are required—monetary policy must work in tandem with fiscal policy, market regulations, and efficient supply chain management. Price hikes can also result from supply-demand imbalances, often exacerbated by natural disasters like floods, which damage crop production and disrupt supply chains.

To effectively combat inflation, all policy instruments must work together. While managing the money supply is one tool, broader economic coordination is essential.

Bangladeshi businesses are currently facing multiple challenges. Export-oriented industries are suffering from energy shortages, which disrupt production. According to the Purchasing Managers’ Index (PMI)—a key indicator of economic health—manufacturing is expanding only marginally. A PMI above 50 signals growth; below 50 indicates contraction. The current PMI reflects weak performance, largely due to the high policy rate limiting access to affordable credit.

In the global context, particularly under protectionist policies like those of the Trump administration, Bangladesh must ensure its domestic policies are supportive of business. A reduction in the policy rate is necessary to stimulate industry and investment. The industrial sector contributes significantly to GDP, and the country is gradually shifting toward an export-led growth model similar to Vietnam’s. To foster such transformation, all policies must support business development.

On the fiscal side, the government should cut unnecessary expenditures and focus on essential, need-based development projects. Over-spending can overheat the economy, driving up inflation. Moreover, the central bank must avoid directly financing government deficits, as this too fuels inflation. Printing money to meet fiscal shortfalls must be avoided.

In conclusion, it is time for Bangladesh Bank to pivot from a contractionary monetary policy. A more expansionary stance would better support businesses, create jobs, and revitalize private sector activity—ultimately boosting the overall economy.

The writer is an economic analyst.