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Bank Job Preparation

Focus Writing
[Inflation]

Presented by

Aashfak Dipu
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A Complete Preparatory Package for Bank Job Written Part

 Developed and Presented by Aashfak Dipu

Types of Inflation
The main types of inflation can be grouped into four broad categories:

1. Demand-pull inflation,
2. Cost-push inflation,
3. Exchange rate pushed inflation and
4. Inflation expectations

Demand-pull Inflation
Functional Flow Chart

‘Aggregate demand’ for ‘Aggregate supply’ for

Price
goods and services goods and services Results
Factors
Spending
Consumer

Government

Net Export

Aggregate

for output
Spending

Increase

Demand

Demand
Results Results
Purchasing

for Wage
Demand

Demand
for labor
Power

Wage
Real

Results Results Results

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 Demand-pull Inflation Inflation returns to
expected level
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Results

Results
Flow-on effects
Stimulates aggregate Households and firms
demand
Results

Results won’t change behavior

Results
Price of goods &
services

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Expectations are
Exchange Rate Pushed Inflation
Stimulates Export
‘anchored’
Results

Inflation Expectations
Cost-push Inflation
Functional Flow Chart

Psychology
Inflation
Domestic Currency
Depreciation of
Level of output
by firms
Results
Households and firms
expects future inflation
Production Cost of

Results
Cost of imported goods
goods & services
and raw materials

Results
Firms raise price &

Results
households accepts
Price of domestic or

Results
imported inputs Cost -push Inflation
Inflation
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Causes of Inflation
Former US President Ronald Reagan very perfectly uttered on inflation, ‘Inflation is
as violent as a mugger, as frightening as an armed robber and as deadly as a hit man’. July,
2024 witnessed the deadliest rate (11.66%) of inflation in last 12 years; the frightening
violence in consumer market since mid 2022 is still hitting the lower income people to the
hardest. A number of global and local circumstances fuelled the situation getting worst, like
as:

 Initial blow came from the exchange rate disruption devalued local currency
approximately 37% (85 taka in 2021 to 117 taka in May, 2024), making importation
costlier and intriguing cost-push inflation to a large extent. Rising cost of imported
petroleum products, capital machineries and raw materials pushed the production
cost to fly significantly and intensified the inflationary pressure.
 Sky-rocketing exchange rate and consequently rising importation cost resulted in
less importation and fuelled demand pull inflation as well. Price of imported food
items and daily necessaries remained out of reach for the low income people.
 Monetary transmission mechanism by the central bank did not come into effect even
though the consecutive 11 times rise of repo rate since May, 2022. Commercial
bank’s interest rate remained cap at 9% from April 2020 to June, 2023. Central Bank
couldn’t use interest rate, the sharpest tools of inflation control timely and hold back
the arrogance of inflation rate.
 The government taking loans from the central bank is equivalent to directly
injecting money into the economy. The central provided more than 2 lac crore taka
in last two fiscal years to support the government's budget expenditure. Therefore,
the contractionary monetary policy measures accompanying expansionary fiscal
actions couldn’t lessen the arrogance of inflation.
 Rising size of the gray economy, prevalence of black money, artificial currency
holding by the public, government funded money flow in mega development
projects, rising government borrowing from the banking sector etc. couldn’t hold
back the direct money injection in the economy and inflation rate remain unabated.

Inflation depletes savings, impedes production, outstrips real wages and discourages
investment. Slow growth and inflation have a tendency to accompany large deficits and
increasing debt. Production is the only answer to the question against inflation that may
lead to come out from this vicious cycle.

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Inflationary Sufferings for the Fixed and Low Income People

Former US President Ronald Reagan very perfectly uttered on inflation, ‘Inflation is as

violent as a mugger, as frightening as an armed robber and as deadly as a hit man’. July, 2024
witnessed the deadliest rate (11.66%) of inflation in last 12 years; the frightening violence
in consumer market since mid 2022 is still hitting the lower income people to the hardest.
Major sufferings are:

 Inflation reduces real income and mounting inflation reduced the middle and lower
income people’s purchasing power significantly. According to WB, about 5 lakh
people will fall into extreme poverty, while 8.4 lakh people will fall into moderate
poverty due to high inflation prevailing last two fiscal years.
 Inflation eroding the savings base of the middle and lower income people. To avail
the basic necessities, people are liquidating their savings and ultimately getting
poorer.
 Inflation reduces the purchasing power of money, disproportionately affecting the
fixed-income earning groups and poorer segment of the population, creates
uncertainties, exacerbates income inequality, contributes to financial instability,
affects international competitiveness, and can lead to a wage-price spiral.
 Inflationary pressure bounds people to compromise with their basic needs; they are
compromising with food and nutritional intake, minimum health services and other
life leading requirements which finally affect the public health and nutrition
significantly.
 Rising inflation agitates general public and turn to public unrest if not addressed
timely. The middle and lower income people may furiously response against the
ruling regime and cause disorder.

Inflation depletes savings, impedes planning, outstrips real wages and discourages
investment. Slow growth and inflation have a tendency to accompany large deficits and
increasing debt. Production is the only answer to the question against inflation that may
lead to come out from this vicious cycle.

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Economic Impacts of Inflation

Debilitate Consumer's Purchasing Power: In an inflationary environment,
unbearable rising prices inevitably reduce the purchasing power of some
consumers, and this erosion of real income is the single biggest cost of inflation.

Impairing Growth: When prices are high, consumers delay making purchases if
they can, anticipating lower prices in the future. For the economy this means less
demand, declining investment, sluggish economic activity and production, lower
economic growth.

Speculative Investment: In time of rising inflation, speculation on a pool of

products may encourage speculative investment, unethical hording of goods or raw
materials that leads to raise the price artificially.

Higher Profits: Inflation benefits the producers of essential products; especially

food and spices, medical and life saving items and offers big return against
investment for the shareholders. This encourages the benefited producers to
produce more and thus the demand supply gap narrows over time and price falls.

More Employment and Better Income: When production increases, there is an

increased demand for the various factors of production, especially manpower.
Therefore, employment and their income increase during inflation.

Benefits to Borrowers: During inflation, the purchasing power of money

decreases. Therefore, if the borrower is paying a rate of interest which is less than
the inflation rate, then he gains in the process. This is because the real value of the
money that the borrower returns is actually less than that of the money borrowed.

Lenders face Losses: Since borrowers benefit from inflation, lenders stand a
chance of losing during such periods. This is because they receive an amount having
lower purchasing power than the amount loaned.

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Steps Taken to Address Rising Inflation

Unbearable inflationary pressure has got the prime concern of the political
leadership, regulators, businessmen and general consumers as well. A number of
measures have been taken to abate the pressure though there is little to be satisfied
as the pressure hasn’t been released yet. Major steps taken so far are:

 Monetary Policy Stance: The latest monetary policies issued by the Central
Bank are contractionary in nature aiming to make investment costlier and
thus reducing money supply. This contractionary monetary stance will
compromise with growth expectation in current FY and hopefully lessen
inflationary pressure.
 Raising Interest Rate: Bangladesh Bank has raised the repo rate from 5.00
percent to 9.50 percent in 28 months and withdrawn the lending cap that
will make the money costlier and reduce money supply in turn.
 Exchange Rate Stabilization: Bangladesh Bank sold more than $15 billion
from reserve to lessen the rising exchange rate and restore stability in
foreign exchange market. Crawling peg method is expected to bring
discipline in exchange rate regime and thus soothing furious inflation in
turn.
 Supply Side Intervention: Bangladesh Bank has implemented effective
supply-side interventions and undertaken various steps to stimulate
employment and investment opportunities while ensuring a sufficient flow
of funds to productive sectors aiming to boost aggregate supply and
reducing supply – demand gap.
 Demand Side Intervention: Government has taken initiatives against the
syndicates who are creating bottlenecks in supply chain artificially which
will stabilize the demand side simultaneously. Steps against hoarding of
necessary goods and price monitoring mechanism will bring public
confidence and thus will reduce extra purchasing tendency of the
consumers.

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Money Market related Regulatory Measures

April 01, 2020

Interest rate cap on lending and deposit (9% & 6%)

[to overcome economic challenges due to the pandemic]

July 01, 2023

The interest rate cap (6%-9%) was withdrawn on July 01, 2023
The variable Six-month Average Rate of Treasury bill (SMART) reference rate was introduced
on 19 June, 2023 to transition from a monetary-targeting to an interest rate-targeting framework.

May 8, 2024

Central bank loosened its age-old grip on the taka; managed floating practice of exchange rate
quoting by the Central Bank was replaced by ‘Crawling Peg’ Exchange Rate System for spot
purchases and sales of US Dollars against taka.
SMART method withdrawn; managed interest rate regime ended and free rate regime starts.

Policy Rate: Timeline

Serial Timeline Repo Rate

1 May, 2022 5.00
2 June, 2022 5.50
3 September, 2022 5.75
4 January, 2023 6.00
5 July, 2023 6.50
6 October, 2023 7.25
7 November 2023 7.75
8 January, 2024 8.00
9 May, 2024 8.50
10 August, 2024 9.00
11 September, 2024 9.50

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