Navigating Rough Tides Ahead

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  • Global Outlook: Central banks globally are nearing the end of their tightening cycles, with the Federal Reserve signaling two additional rate hikes before reaching the cycle’s conclusion. The economic slowdown and a banking crisis in the US have diminished the urgency for further sharp rate hikes. As a result, the likelihood of the Dollar index strengthening is low, alleviating pressure on global currencies, including the Bangladeshi taka.
  • Recap of policy measures in Bangladesh and its impact on the economy: In the past year, a contrast emerged between major advanced economies adopting tight monetary policies with substantial interest rate hikes, while Bangladesh pursued a macroeconomic strategy aimed at achieving low inflation, exchange rate stability, and stimulating economic growth through low-interest rates. This pursuit of the “impossible trinity” resulted in macroeconomic imbalances, including high inflation, currency depreciation, and a shortage of US dollars.
  • Macroeconomic Outlook H1’FY2024: Considering external factors and involvement in an IMF program, the central bank of Bangladesh is scheduled to announce its monetary policy on 18th June. The central bank finds itself in a challenging situation without any favorable options. Two policy paths lie before the central bank- an aggressive stance would help stabilize the macroeconomic situation but potentially lead to slower growth and an increase in non-performing loans within the banking system. Conversely, opting for a progressive stance would support growth but may result in higher inflation, and further depreciation of the currency.
  • a) Aggressive Response: Under the Aggressive Response, the policy measures will be aimed at tackling inflation and currency depreciation through tighter monetary policies. Based on the policy measures, CAL expects interest rates for 364-day T-bills to be around 10.6% to 11%, c.7% depreciation of the taka against the dollar, and sustained elevated inflation of approximately 8.2% to 8.5%.
  • b) Progressive Response: Under the Progressive Response scenario, the policy measures will be aimed at prioritizing policies that promote growth over cautious approaches. Based on the policy measures, CAL expects interest rates for 364-day T-bills to be around 8.3% to 8.6%, c.15% depreciation of the taka against the dollar, and an increase in inflation to 10.5% to 11.0%.
  • Investment Strategy: In the event of a potentially aggressive stance, we recommend a shift towards short-term fixed-income securities to capture yield opportunities. In contrast, if a progressive approach is chosen, we recommend increasing exposure to equities and real estate assets due to potential opportunities from debt monetization.
  • Consistent with our usual practice, we will publish an updated forecast in our monetary policy review for H1’FY2024 based on the adopted policy changes in the upcoming monetary policy statement by Bangladesh Bank.