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Chapter- 01
Introduction

Introduction 01
Rational of the study 01
Objective of the study 02
Scope of the study 02
Methodology of the study 02
Limitations of the study 02



Chapter- 02
Body of the term paper

Monetary Policy 03
Reason of publishing 03
Scope & Objective of Monetary Policy 04
Types of Monetary Policy 05
Monetary Policy in Bangladesh 06
Tools & Strategy of Monetary Policy 06
Major tools used by Bangladesh Bank 07
Policy Target 12
Limitations of Monetary Policy 13

Chapter-03
Findings of the study
14
Conclusion 14
Bibliography 14

Chapter- 01
Introduction
Monetary policy is the process by which the monetary authority of a country controls
the supply of money, often targeting a rate of interest for the purpose of promoting
economic growth and stability. The official goals usually include relatively stable prices and
low unemployment. Monetary theory provides insight into how to craft optimal monetary
policy. It is referred to as either being expansionary or contractionary, where an expansionary
policy increases the total supply of money in the economy more rapidly than usual, and
contractionary policy expands the money supply more slowly than usual or even shrinks it.
Expansionary policy is traditionally used to try to combat unemployment in a recession by
loIring interest rates in the hope that easy credit will entice businesses into expanding.
Contractionary policy is intended to slow inflation in hopes of avoiding the resulting
distortions and deterioration of asset values.
In this report I tried to show that how monetary policy is related to the economy of our
country & how it works in our country.

Rationale of the study
The case study is assigned by our course teacher Nafisa Rounok as a part of our
Monetary Policy course. The topic of our case study is Monetary Policy in
Bangladesh. By conducting this study I can enhance our knowledge and skill to apply
various research methods in professional life on higher educational life. The report has given
us a chance to raise our quality in developing research instrument and its applications. By
doing so, I can boost our acceptability in job market and develop our real life knowledge.

Objective of the Case Study
Primary objective
The main objective of the study is to know about the monetary policy used in our country.

Secondary objective:
The case study has the following objectives:
To know about monetary policy & its types.
Tools of monetary policy used by Bangladesh Bank.
To know about the strategy of monetary policy.

Scope
There are huge scopes to work in the area of this Case Study. Considering the dead line, and
exposure of the paper has been wide-ranging. The study Monetary Policy in Bangladesh
has covered overall scenario of macroeconomics situation of Bangladesh. I have a chance to
work on the economic variable used in modern economic world. By doing the assignment, I
are able to know that the importance of monetary policy of our growing economy. In the case
study I discussed about the importance, types strategy of monetary policy & tools of
monetary policy used by BB.

Methodology
I have used the concept of the course, information of the case study.
Sources of Data
Here the secondary sources of information are used. The secondary sources are:
Books.
Website.

Liitations
While conducting the report on Monetary Policy in Bangladesh, some limitations Ire yet
present there:
Because of time shortage many related area cant be focused in depth.
Website in different organization of Bangladesh contains poor information.








Chapter-!
Monetary "olicy
The regulation of the money supply and interest rates by a central bank, such as the Central
Bank of Bangladesh in order to control inflation and stabilize currency. Monetary policy is
one the two ways the government can impact the economy. By impacting the effective cost of
money, the Bangladesh Bank as a controller of monetary policy can affect the amount of
money that is spent by consumers and businesses.
Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability. The official goals usually include relatively stable prices and low
unemployment. . Monetary theory provides insight into how to craft optimal monetary policy.
Monetary policy is the process by which the government, central bank, or monetary authority
of a country controls
a) the supply of money,
b) availability of money, and
c) Cost of money or rate of interest to attain a set of objectives oriented towards the
growth and stability of the economy.
d) Monetary theory provides insight into how to craft optimal monetary policy.

Reasons of publishing Monetary "olicy Stateent
The objectives for which The Central Bank of Bangladesh adopts the half yearly MPS H2
FY11 are given below:

To support the governments goal of faster inclusive economic growth and poverty
reduction, besides maintaining monetary and price stability.

To anchor inflation expectation of the markets is 7.5% in FY12 and the existing rate is
10.17%. At present condition authority are unable to decrease the price of consumer
products so it is wise to make the price stable by setting the inflation rate at 7.5%.

Achieving an inclusive economic growth by facilitating productive sectors while
keeping inflationary pressure under control. By fixing inflationary rate the authority
trying to increase the outcomes using the maximum infrastructure of the productive
sectors which will contribute in the national income.

Discouraging credit flows to unproductive sectors whereas increasing credit flow to
productive sectors. As we all know by increasing dependence on domestic goods and
decreasing dependence on imported goods one country can go up to our expectations.

To keep domestic borrowing conditions easy in a recessionary global environment,
the central bank has refrained from Reverse Repo operations since the last quarter of
FY11 and has announced to continue it in the second half of the current fiscal year.

It is set to strengthen its oversight on liquidity, capital adequacy and risk management
in banks and financial institutions to protect the domestic financial sector from
instabilities of the kind now afflicting markets in advanced economies.

Scope of onetary policy
Monetary decisions today take into account a wider range of factors, such as:
Short term interest rates;
Long term interest rates;
Velocity of money through the economy;
Exchange rates
Credit quality
Bonds and equities (corporate ownership and debt)
Government versus private sector spending/savings
International capital flows of money on large scales
Financial derivatives such as options, swaps, futures contracts, etc.

Objectives of onetary policy
The objectives of a monetary policy in Bangladesh aim at growth, stability and social justice.
After the Keynesian revolution in economics, many people accepted significance of monetary
policy in attaining following objectives.
Rapid Economic Growth
Price Stability
Exchange Rate Stability
Balance of Payments (BOP) Equilibrium
Full Employment
Neutrality of Money
Equal Income Distribution

These are the general objectives which every central bank of a nation tries to attain by
employing certain tools (Instruments) of a monetary policy. Let us now see objectives of
monetary policy in detail:-
Rapid Economic Growth
It is the most important objective of a monetary policy. The monetary policy can influence
economic growth by controlling real interest rate and its resultant impact on the investment.
Price Stability
The monetary policy having an objective of price stability tries to keep the value of money
stable. It helps in reducing the income and wealth inequalities.

Exchange Rate Stability
Exchange rate is very volatile leading to frequent ups and downs in the exchange rate, the
international community might lose confidence in our economy. The monetary policy aims at
maintaining the relative stability in the exchange rate.
Balance of Payments (BOP) Equilibrium
The BB through its monetary policy tries to maintain equilibrium in the balance of payments.
The BOP has two aspects i.e. the 'BOP Surplus' and the 'BOP Deficit'. If the monetary policy
succeeds in maintaining monetary equilibrium, then the BOP equilibrium can be achieved.
Full Employment
'Full Employment' stands for a situation in which everybody who wants jobs get jobs.
However it does not mean that there is a Zero unemployment. In that senses the full
employment is never full. Monetary policy can be used for achieving full employment. If the
monetary policy is expansionary then credit supply can be encouraged. It could help in
creating more jobs in different sector of the economy.
Neutrality of Money
The monetary policy should regulate the supply of money. The change in money supply
creates monetary disequilibrium. Thus monetary policy has to regulate the supply of money
and neutralize the effect of money expansion.
Equal Income Distribution
Monetary policy can make special provisions for the neglect supply such as agriculture,
small-scale industries, village industries, etc. and provide them with cheaper credit for longer
term. This can prove fruitful for these sectors to come up. Thus in recent period, monetary
policy can help in reducing economic inequalities among different sections of society.

#ypes of Monetary "olicy

Monetary policy in $angladesh
As stated in the Bangladesh Bank Order 1972, the principal objectives of the country's
monetary policy are
1. To regulate currency and reserves;
2. To manage the monetary and credit system;
3. To preserve the par value of domestic currency;
4. To promote and maintain a high level of production, employment and real income; a
5. To foster growth and development of the country's productive resources in the best
national interest.
Although the long term focus of monetary policy in Bangladesh is on growth with stability,
the short-term objectives are determined after a careful and realistic appraisal of the current
economic situation of the country.

#ools of onetary policy
Major instruments of monetary control available with Bangladesh Bank are the bank rate,
open market operations, rediscount policy, and statutory reserve requirement.
The methods of credit control can be classified as follows:

Quantitative/ General Methods Qualitative/ General Methods
01. Bank rate policy 01. Rationing of credit
02. Open market policy 02. Direct action
03. Variation of reserve ratio 03. Regulation of consumers credit
04. Moral persuasion
05. Publicity


Strategy of Monetary "olicy
The MPS (Monetary Policy Statement) starts with expression of the monetary policy
frameworks in terms of the goals, instrument, and the channels of transmission. Maintaining
price stability while supporting the highest sustainable output growth is the stated objective
of monetary policies pursued by the Bangladesh Bank.
.

Major Monetary "olicy Instruents %se by $angladesh $an&
Bank rate
Bank rate, also referred to as the discount rate, is the rate of interest which a central bank
charges on the loans and advances that it extends to commercial banks and other financial
intermediaries. Changes in the bank rate are often used by central banks to control the money
supply.
The rate which central bank lends money to the commercial banks and discounts bill of
exchange is called bank rate. If central bank increases the bank rate then the commercial
banks will increase their marker of interest rates. As a result the borrowers borrow less form
commercial banks and amount of credit reduces in the economy. In an opposite way amount
of credit will be increased in the country.

Impacts of Bank Rate Changes
BB(Bank rate) Effects: Increase
(cost of credit,
unemployment,
price level);
Decrease
(Production,
export,
investment).
Effects: Increase
(other interest
rate, investment,
and export);
Decrease
(leakage of
domestic capital,
price level,
import).
Effects:
An stable
situation is
found CB(Interest rate)
Borrowers(Advance)
Increase= ; Decrease= ; Stable=
BB: Bangladesh Bank ; CB: Commercial Bank.


Open market operations
Open market operations are the means of implementing monetary policy by which a central
bank controls the short term interest rate and the supply of base money in an economy, and
thus indirectly the total money supply. This involves meeting the demand of base money at
the target rate by buying and selling government securities, or other financial instruments.
Monetary targets such as inflation, interest rates or exchange rates are used to guide this
implementation.
BB mainly injects or withdraws reserves from the banking system through open market
operations (OMO). This is pursued in two ways:
The first type is the outright purchase or sale of approved securities through weekly auctions
in volumes consistent with the growth paths for RM and M2 targeted in the annual monetary
program. BB injects reserves into the banking system by purchasing approved securities and
withdraws reserves from the banking system by selling them. By adjusting the amount and
the officially acceptable interest rate at auctions, BB influences the successful bidding rate,
and the subsequent public announcement of this rate can convey its intention regarding short-
term interest rates.
For instance, if BB intends to raise short-term interest rates, it increases the scale of its
auction in absorbing operations and raises its internally acceptable bidding rate so as to push
up the successful bidding rate of the auction and thus mop up excess liquidity from the
banking system, which influences short-term interest rates. Any significant changes in the
interest rate may persuade the stockholders to recalculate their return through dividend
discount window and may react accordingly.
The second type of OMO is repo (repurchase agreement) and reverse repo auctions. In order
to facilitate liquidity management on a day-to-day basis, BB goes for second type of open
market operation, either through repurchase agreement (repo) to temporarily add reserves or
through reverse repurchase agreements (reverse repo) to temporarily withdraw reserves.
Repurchase agreements are essentially short-term loans collateralized by underlying
approved securities. BB buys the underlying assets for a given price with an agreement by the
selling institution to buy it back at a specified date and price. As the counterpart of repo
auctions, BB accepts excess funds from the banks in ascending order of interest rates to the
extent needed to maintain the intended level of liquidity. It can be mentioned that BB has
introduced repo and reverse repo operations from July 2002 and April 2003 respectively.
Impacts of the OMO
Reverse repo and repo interest rates are BBs day to day instruments influencing the growth
path of reserve money, ultimately to influence inflation via growth path of broad money.
Recently, in the backdrop of the global economic slowdown the routine reverse repo
operations are also being used sparingly, to keep credit conditions easy;



Statutory reserve requirement
Statutory Liquidity Ratio(SLR)
The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing
it respectively. This counter acts by decreasing or increasing the money supply in the system
respectively. In terms of section 33(1) of the Bank Company Act of 1991, the Statutory
Liquidity Requirement (SLR) is the minimum (in percentage of total time and demand
liabilities) that a scheduled bank has to maintain in liquid assets with BB. The rate was set at
18 percent since 2005. Specialized banks are exempted while banks guided by Islamic laws
are required to keep reserve at the concessional rate of 10 percent.
The objectives of SLR are:
To restrict the expansion of bank credit.
To augment the investment of the banks in Government securities.
To ensure solvency of banks.

Value and Formula
The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the
liabilities of the bank which are payable on demand anytime, and those liabilities which are
accruing in one months time due to maturity) of a bank.
SLR Rate = Total Demand/Time Liabilities x 100%

Cash reserve requirement (CRR)
The cash reserve requirement (or required reserve ratio or only reserve requirement) is a bank
regulation that sets the minimum reserves each bank must hold to customer deposits and
notes. These reserves are designed to satisfy withdrawal demands, and would normally be in
the form of fiat currency stored in a bank vault (vault cash), or with a central bank.
The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's
economy, borrowing, and interest rates.
BB requests banks to keep five percent of their demand and times liabilities on account at the
central bank. Cash in till is not eligible for the CRR.
Impacts of SLR & CRR
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) for scheduled banks are the
other monetary policy tools, used sparingly in situations of drastic imbalances from major
shocks.











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1997-
1998
20 5 7.5 2.71 9.73 13.69 6.67 7.02 3.96 5.40
1998-
1999
20 5 8 -1.59 5.36 14.02 7.07 6.95 8.66 5.20
1999-
2000
20 5 8 0.22 7.10 14.16 7.28 6.88 7.06 4.90
2000-
2001
20 4 7 4.42 11.07 13.86 7.21 6.65 2.79 5.90
2001-
2002
20 4 7 5.09 11.81 13.75 7.03 6.72 1.94 5.27
2002-
2003
20 4 6 3.95 10.37 13.16 6.74 6.42 2.79 4.42
2003-
2004
20 4 6 1.91 8.40 12.78 6.29 6.49 4.38 5.26
2004-
2005
16 4 5 -0.18 5.18 11.01 5.65 5.36 5.83 6.27
2005-
2006
16 4.
5
5 -0.87 4.44 10.93 5.62 5.31 6.49 5.96
2006-
2007
18 5 5 -0.48 4.90 12.06 6.68 5.38 7.16 6.63
2007-
2008
18 5 5 -0.35 5.58 12.78 6.85 5.93 7.20 6.43
2008-
2009
18 5 5 -2.99 2.35 12.29 6.95 5.34 9.94 6.21
2009-
2010
18 5 5 11.9 7.0 4.9 6.50 5.90
Source: Annual Reports, BB

4 Lending channel: If SLR Bank lending Bank investment that will Y
(output).
Cash flow channel: If SLR Cash flow of bank Interest rate Bank investment
that will Y (output).
#he "olicy #arget's(
In this backdrop it is necessary that the monetary policy framework be articulated for greater
clarity and transparency benefiting both the policy makers and the
stakeholders. A policy system, where the goals are transparent and their achievement
verifiable, directly adds to the credibility of the central bank, a major objective of this
document is to define such a framework. In contrast, however, the challenge in the
developing world is how to augment the capacity output through both productivity growths as
well as via the installation of additional capacity. Hence the appropriate monetary policy
strategy in the Bangladesh context would be to achieve the goal of price stability with the
highest sustainable output growth.
Inflation Target
It is the general wisdom that monetary policy tools are of immediate influence in controlling
inflation. However, contemporary evidence amply illustrates that monetary policy cannot
deal well with the inflationary impact of external shocks such as the recent international price
of oil & related energy products. Many central banks as a consequence focus on the core
inflation which is typically constructed by subtracting the most volatile components (e.g.
food & energy prices, indirect taxes, etc.) from the consumer price index (CPI). As a policy
goal, core inflation may be a more credible target then CPI inflation. While there is no
standard measure of core inflation in Bangladesh context at this time, the construction
methodology is made complex by two facts. First is that food items constitutes nearly 60% of
the CPI index, and while the appropriate commodity group weights may require a re-think, to
ignore food entirely in defining the core inflation may render the construction a bit like
throwing the baby away with the bath water. Secondly, in Bangladesh context, the volatility
of the international energy prices appear not to filter down to the CPI since the relevant
domestic prices is subsidized by the state. Periodic adjustment in administered energy prices
have always lagged the world market changes in both the time line as well as in magnitude
often most dramatically. While it may be useful to focus on the non-food component of the
index (which occupies only 41.6% of the full CPI) in order to gauge at the build-up of
underlying inflationary forces in the economy, it would be unwise to treat this alone as a
valid measure of core inflation.
Growth target
GDP growth projections of the Medium Term Macroeconomic Framework (MTMF) in the
government's National Strategy for Accelerated Poverty Reduction (NSAPR), modified
appropriately in the light of unfolding actual developments, are used as output growth targets
for the purpose of monetary policies.






Liitation of Monetary "olicy in )eveloping Country
In developing country, monetary policy suffers from the following limitations
In under developing countries, and capital markets are narrow and unorganized. Similarly, in
the situations, the instrument the reserve requirement does not function properly. By its
nature, monetary policy is not effective in the short run. The role of monetary policy is not
compulsive but permissive. This seriously limits the efficiency of monetary policy in
backward countries. In under developed society where liquidity trap is in existence monetary
policy cannot work efficiently. Administrative honesty and firmness are not very rigorous in
less regular countries which reduce the efficiency of monetary policy a policy a lot.
Lastly, the lag between the decision about a particular policy and its implementation also
hinders the monetary policy in its success. Here we found that monetary policy suffers from
various limitations in the developing country. So, it should be supplemented by fiscal policy
to make it effective. Despite this information, monetary policy sets the tone of economic
development in recent years.



















Chapter-0*
+indings and conclusion
+indings of the study
The intension of this study is to know how to work with digital information system. The
major findings of the overall study are discussed below:

Objectives of the monetary policy.
Tools of monetary policy used by Bangladesh Bank.
Reason behind publishing the monetary policy.
Know about the bank, interest, repo, reverse repo, etc.
The overall economic & monetary scenario of Bangladesh.

Conclusion
The Monetary Policy Statement (MPS) is intended to outline the objective and the modalities
of formulation & conducting of monetary policy by the BB, its assessment of the recent and
the expected monetary and price developments, and the stance of monetary policies that will
be pursued over the near term. Objectives of the monetary policies of BB as outlined in the
Bangladesh Bank Order, 1972 comprise attainting and maintaining price stability, high levels
of production, employment and economic growth in such a directed regime with little or no
role of financial prices in influencing the magnitudes or directions of credit the present MPS
provides the monetary policy stands that BB intends to follow during first half of FY11-12.
The prime objective of the policy stance is to ensure the use of the financial instruments
towards promoting real sector growth at its targeted level along with ensureing reasonable
price stability. The policy stance takes into account recent developments in real, external,
fiscal & monetary sectors of the economy and the near term macroeconomic outlook for the
remaining period of FY11.
$ibliography

$oo&s
Frederic S. Mishkin; The economics of Money, Banking, and Financial Markets; 7
th

Edition. (International Edition: Pearson Book Company, 2008).

,eb Sites
1. www.bb.org.bd
2. www.mof.gov.bd
3. www.economywatch.com
4. www.en.wikipedia.org