Money gets cheaper, yet takers are hard to get

Healthy commercial banks have trimmed both lending and deposit rates by 1-2 percentage points in recent months. This comes as private-sector credit growth dropped to 4.47% in June – the lowest level in 33 years. Average deposit rates at most institutions now hover between 7% and 8%, while lending rates range from 10% to 11%. With minimal credit demand from businesses, banks have piled into government securities, driving yields on all Treasury bills and bonds down into single digits.

By June 2026, total excess liquidity in the banking sector surged by 39.40% year-on-year to exceed Tk4 lakh crore. The foreign-exchange market shows a similar imbalance: robust dollar inflows and weak import demand have created upward pressure on the taka. To prevent sharp currency appreciation and protect exporters and remitters, the central bank resumed dollar purchases from commercial banks on 1 September, buying $50 million at Tk122.75 – well above market remittance rates of Tk122.30-122.60. Gross foreign-exchange reserves subsequently rose by nearly $5 billion over the year, reaching $36.33 billion by 3 September.

This rate decline occurs against a fragile macroeconomic backdrop marked by sluggish growth, persistent inflation, and high unemployment, raising fears of stagflation. Although inflation eased to 8.26% in August, it remains comfortably above the government’s 7.5% target for FY27. Because prices were already elevated last year, this ongoing inflation compounds a high baseline, keeping consumer prices uncomfortably high.

In response, Bangladesh Bank is injecting liquidity via stimulus measures and planning further monetary easing to reignite investment. However, economists and bankers warn that injecting liquidity without addressing structural bottlenecks will fail to revive real demand and could aggravate inflation.

Why is Bangladesh Bank cutting rates?
In July, Bangladesh Bank lowered its policy rate by 50 basis points to 9.5% to spur private investment. This marked a clear departure from the tight monetary stance maintained since 2022, during which the policy rate was gradually raised from 5% to 10% and kept there for nearly two years from October 2024.

“Our earlier assumption was that raising the policy rate would make money expensive, reduce liquidity, and curb inflation,” a senior Bangladesh Bank executive said on condition of anonymity. “However, that mechanism failed in our context. Despite keeping the rate high for two years, inflation remained stubborn.”

The official added that elevated interest rates instead drove up corporate financing and production costs, which firms passed directly to consumers. “We are now testing a supply-side strategy: lower the policy rate to reduce production and import costs. If supply expands and unit costs fall, prices should moderate.”

Easier money risks fueling inflation
Md Ezazul Islam, Director General of the Bangladesh Institute of Bank Management, argues that lower interest rates are a symptom of economic paralysis. “Economic activity remains constrained by gas and electricity shortages, the lingering aftershocks of recent political instability, and global uncertainty,” Islam noted.

While deposit growth has remained steady, banks cannot generate matching credit due to absent loan demand. “Banks naturally redirect excess funds into government Treasury bills and bonds. With heavy government borrowing and intense competition among banks for these safe assets, yields drop. That is basic market dynamics,” Islam said, adding that the trend will persist until private credit demand rebounds.

Islam cautioned that monetary easing without productive capacity risks worsening inflation. “Job creation and investment are primarily fiscal responsibilities. If the government wants to stimulate the economy, it must deploy fiscal tools through the budget – such as tax relief, infrastructure spending, and securing energy supplies – rather than over-relying on central bank liquidity.”

Structural hurdles mute credit demand
Despite lower borrowing costs, credit demand shows no sign of recovery. City Bank, one of the country’s prominent private lenders, recorded just 7%-8% credit growth over the first nine months of the year – half its historical average – despite double-digit deposit growth.

A senior executive at the bank noted that expected credit demand failed to materialise even after post-election political uncertainty subsided. “Even when we offer competitive rates to large corporate clients, many refuse to borrow due to persistent gas shortages,” the executive said. Consequently, City Bank redirected surplus liquidity into government debt and deployed over Tk 2,000 crore into the central bank’s stimulus fund.

The executive also cast doubt on the official 4.47% private-sector credit growth figure for June. “Real growth is likely negative; much of that figure reflects forced loans and accrued interest on existing facilities.”

He noted that the central bank’s Tk60,000 crore stimulus package equals roughly 3% of total bank loans. Fully implementing it would only push credit growth to 7%-8% – far below the 15%-16% required to support the government’s 6.5% GDP growth target for FY27. “Furthermore, banks will not take the risk of lending to distressed or insolvent businesses simply because money is cheap,” he added.

Certainty over cheap money
Tareq Refat Ullah Khan, managing director of BRAC Bank, emphasised that falling rates stem directly from surplus liquidity rather than intentional economic stimulus. “When credit growth halts, money builds up. Lowering rates alone cannot create demand if the wider business environment remains unsupportive.”

BRAC Bank has lowered corporate lending rates to 11%-12% (with select prime clients receiving 9%-10%), while SME rates have dropped to 14%-15% and retail rates to 11%-12%. Deposit rates across sound banks have settled around 8%-9%. Distressed banks continue offering 11%-12% on deposits solely to maintain liquidity, rather than to finance new lending.

Abul Kashem Md Shirin, former managing director of Dutch-Bangla Bank, observed that major industrial borrowers are holding back expansion plans due to broader uncertainty. “When liquidity is abundant and credit demand falls, rates drop naturally. Bangladesh Bank spent years trying to force interest rates down through directives, but market forces are finally driving the adjustment automatically – which is precisely how a market economy ought to function.”