Bangladesh Bank MPS For July-December 2025

The Monetary Policy Statement (MPS) for July-December 2025 (H1FY26) from Bangladesh Bank (BB) is more than just a financial report; it’s a comprehensive roadmap outlining the nation’s economic strategy for the coming months. Released amidst a backdrop of significant macroeconomic challenges and a shifting political landscape, this MPS reflects Bangladesh Bank’s steadfast commitment to navigating economic turbulence, fostering stability, and driving sustainable growth. This post will delve into the key aspects of the MPS, from its underlying context to the forward-looking policy initiatives that aim to reshape Bangladesh’s financial future.

Table of Contents

The Macroeconomic Landscape: A Recent Review (H2FY25)

The current interim Government, which took office in August 2024, inherited an economy grappling with significant challenges. These included persistently high inflation, a depreciating exchange rate, depleting foreign exchange (FX) reserves, a buildup of external payment arrears, tight liquidity conditions, a lack of good governance, and elevated non-performing loans (NPLs). The MPS acknowledges that these issues led to a “faltering economy characterized by institutional collapse”.

In response, Bangladesh Bank has articulated clear and forward-looking strategies, emphasizing its commitment to containing inflation, stabilizing the exchange rate, rebuilding foreign exchange reserves, and restoring confidence in the banking sector through improved governance. To achieve these goals, BB adopted a tight monetary policy stance and implemented a fully flexible market-based exchange rate regime. Additionally, a wide range of reform programs targeting the banking sector were initiated.

These measures have begun to yield visible results. Headline inflation, which peaked at 11.66 percent in July 2024, gradually eased to 8.48 percent by June 2025, marking the first time in over two years it fell below 9 percent. Exchange rate stability was achieved through a substantial improvement in the Balance of Payments (BoP) and BB’s initiatives towards a fully flexible exchange rate regime, which also contributed to rebuilding foreign exchange reserves. Furthermore, accountability and good governance are gradually being restored in the banking sector, leading to improved depositor confidence and an easing liquidity situation.

Monetary Policy Stance and Projections for H1FY26

The core objective of the H1FY26 MPS is to decelerate the rate of inflation further while maintaining exchange rate stability and strengthening financial stability. Bangladesh Bank has aligned its policies with the Government’s budgetary targets of achieving 5.5 percent GDP growth and containing inflation within the 6.5 percent ceiling for FY26.

Key Aspects of the Monetary Policy Stance:

Tight Monetary Policy: BB will continue its tight monetary policy stance in the first half of FY26 to contain inflation and anchor inflation expectations.
Policy Rates: The policy repo rate will remain unchanged at 10.0 percent if the inflation rate stays above 7%. The Standing Lending Facility (SLF) rate will remain at 11.5 percent, and the Standing Deposit Facility (SDF) rate will be 8.0 percent.
Future Adjustments: BB will continuously monitor inflation and liquidity. Once projections consistently show a decline in inflation and the policy rate in real terms reaches 3.0 percent, BB will gradually begin to lower the policy rate. Policy rates may also be adjusted if exports weaken due to tariff shocks and a weaker global growth outlook, accompanied by depreciation pressures.
Flexible Exchange Rate Regime: BB adopted a more flexible exchange rate regime in May 2025 to enhance stability in the foreign exchange market. This flexibility is crucial for smoother adjustments to external imbalances, easing foreign exchange market pressures, and preserving foreign reserves, especially amid escalating trade tariffs impacting exports. BB publishes a reference exchange rate twice a day as a benchmark for price discovery. BB also plans to intervene in the foreign exchange market to curb volatility and ensure greater stability, consistent with the flexible regime, and to rebuild foreign exchange reserves.

Monetary and Credit Projections for FY26:

The MPS outlines specific projections for key aggregates:

Broad Money (M2): Projected to grow by 8.5 percent.
Reserve Money (RM): Expected to grow by 8.0 percent.
Private Sector Credit Growth: Projected at 8.0 percent, factoring in the contractionary monetary policy and lower credit demand. BB will also ensure supply-side interventions to support credit flows to productive sectors like agriculture and Cottage, Micro, Small, and Medium Enterprises (CMSMEs) through refinance and pre-finance schemes.
Public Sector Credit Growth: Projected at 18.1 percent, considering lower credit demand from the Government due to austerity measures and a budgetary borrowing target of Tk. 1,040.0 billion from the banking system.
Domestic Credit Growth: Projected at 10.3 percent.
Net Foreign Assets (NFA): Expected to show positive growth of 21.8 percent, driven by an anticipated surplus in the overall balance of payments, with predicted 10.0 percent growth in exports and remittances, and 8.0 percent growth in imports.

Macroeconomic Outlook

The MPS provides an in-depth look at various macroeconomic indicators and their outlook for H1FY26:

1. Price Developments and Outlook (Inflation):

Recent Trend: Headline point-to-point inflation dramatically decreased from a peak of 11.66 percent in July 2024 to 8.48 percent by June 2025. Food inflation specifically reduced from 14.10 percent in July 2024 to 7.39 percent in June 2025.
Drivers of Decline: This success is attributed to BB’s tight monetary policy stance (policy rate steady at 10% since October 2024), exchange rate stabilization through the Crawling Peg system and enhanced flexibility, and government supply-side interventions such as rationalizing import duties, eliminating Letter of Credit (LC) margin requirements for key imports, and good harvests. Favorable international commodity prices also played a role.
Challenges/Impediments: Factors that previously delayed the transmission of monetary tightening included a loose monetary policy with a negative real policy rate and interest rate constraints until May 2024. Depreciation of the BDT since 2022 had a significant pass-through effect, amplifying inflation. Supply chain disruptions from political turmoil and floods, along with consumer hoarding, also contributed to price volatility.
Outlook for H1FY26: BB projects the downward trend in inflation to continue, approaching the target range of 6.5–7.0 percent by the end of 2025. This aligns with the IMF’s projection of 6.2 percent for FY26. This optimistic outlook is supported by an expected positive real policy rate, robust remittance inflows, improved foreign exchange reserves, and stable global commodity prices.
Risks: Lingering risks include weather-related disruptions impacting agricultural output, renewed global supply chain shocks, intensification of geopolitical tensions, and ongoing cost pressures from the nominal depreciation of the Taka due to U.S. reciprocal tariff measures.

2. Growth:

FY25 Performance: Real GDP growth for FY25 is estimated at around 3.97 percent, marking the slowest expansion in recent years and falling short of the government’s initial target of 6.75 percent. Sectoral performance was mixed, with agriculture slowing, while industrial and services sectors showed modest recovery.
Growth Dynamics: Political stabilization, resilient external sector performance (driven by remittances and RMG exports), and policy support through fiscal discipline and effective monetary policy have fostered a more conducive environment for growth.
Constraints: Stress in the banking sector, including rising NPLs and limited credit growth, has constrained private sector expansion. Global headwinds such as sluggish growth in key trading partners, rising trade barriers, and geopolitical uncertainties continue to pose risks.
Outlook for H1FY26: The growth outlook is cautiously optimistic, with a government GDP growth target of 5.50 percent for FY26. International organizations like the IMF, World Bank, and ADB project growth between 4.90 percent and 5.40 percent, which BB’s model-based forecast aligns with. This rebound is expected from improved stability, resilient external sector, and anticipated rise in private sector investment. The government’s emphasis on infrastructure investment and FDI will also provide impetus.
Risks: Persistent weaknesses in the banking sector, global economic uncertainties (e.g., trade wars, US tariff hikes), and structural bottlenecks (e.g., need for further economic reforms) remain challenges.

3. Liquidity and Interest Rate:

Liquidity Situation: Bangladesh’s banking sector experienced a tight liquidity situation in FY25 due to factors like high NPLs, loan fraud, deposit withdrawals (especially from Shariah-based banks), and the discontinuation of the 28-day repo facility.
BB’s Response: BB provided unsterilized liquidity support to struggling banks and reduced the cash reserve requirement (CRR) from 3.5 percent to 3.0 percent. In H2FY25, BB provided Tk. 12,09,117.8 crore in liquidity support, including Tk. 84,417.7 crore to Shariah-based Islamic banks.
Interest Rates: The weighted average call money rate increased to 10.14 percent in June 2025 (from 9.08 percent in June 2024). The interbank repo rate also rose to 10.37 percent (from 8.56 percent). The weighted average nominal lending rate reached 12.11 percent in May 2025, and the nominal deposit rate reached 6.29 percent.
Real Interest Rates: The real lending rate turned positive in February 2024, reaching 3.1 percent by the end of May 2025. The real deposit rate, while still negative, significantly improved from negative 4.2 percent in June 2024 to negative 2.8 percent in May 2025. BB expects its efforts to contain inflation and the upward trend in interest rates to help mitigate the issue of negative real interest rates on deposits.

4. External Sector Developments and Exchange Rate:

Overall Stability: The external sector largely stabilized in FY25, supported by exchange rate flexibility, a balanced policy mix, foreign assistance inflows, a surge in remittances, and robust export growth.
Balance of Payments (BoP): The BoP flipped to an overall surplus of USD 3.29 billion in FY25, a significant improvement from a USD 4.3 billion deficit in FY24. The Current Account Balance (CAB) also returned to a surplus of USD 981 million from a large deficit.
Trade and Remittances: Exports grew by 8.6 percent to USD 48.3 billion in FY25, primarily driven by Ready-Made Garments (RMG). Imports showed a moderate growth of 2.4 percent. Remittance inflow reached an all-time high of USD 30.33 billion with 26.8 percent growth in FY25, boosted by market-driven exchange rates and strict oversight against informal networks.
Exchange Rate Movement: Following a May 14, 2025, circular allowing free movement, the interbank exchange rate of BDT vis-à-vis USD experienced mild depreciation before stabilizing with an appreciation bias in June 2025. It stood at 122.77 at the end of June 2025, a 3.89 percent depreciation for FY25. BB’s intervention in the foreign exchange market was phased out from May 15 to June 30, 2025, to foster effective interbank market functioning.
Foreign Exchange Reserves: Gross international reserves (BPM 6) sharply increased to USD 26.7 billion at the end of June 2025, up from USD 21.7 billion at the end of the previous fiscal year, largely due to a sizable inflow of foreign assistance.
Outlook: The BoP is expected to continue improving in FY26. However, risks like new US tariffs on Bangladeshi products (especially RMG) and growing domestic political uncertainty could hinder export growth and FDI.

5. Capital Market:

Weak Performance: Bangladesh’s capital market showed a weak performance in H2FY25, with a downward trend in price indices and average turnover, affected by domestic high inflation, political uncertainty, and global tensions. The DSEX benchmark index dropped by 7.2 percent.
Reform Initiatives: The Bangladesh Securities and Exchange Commission (BSEC) has implemented reforms to restore investor confidence, including reducing capital gains tax and providing sovereign guarantees to the Investment Corporation of Bangladesh (ICB). The government is developing a liquid bond market and urging large corporations to raise capital through bonds or equity instead of solely relying on bank loans.
Government Securities and Funds: A total of 239 government treasury bonds were actively traded until June 2025. BB also issued “Sukuk” bonds worth BDT 50 billion, which banks and Non-Bank Financial Institutions (NBFIs) can use for statutory liquidity reserve (SLR) compliance. A special Tk. 200 crore fund for capital market investments by scheduled banks has been extended until December 31, 2026.
Future Plans: The interim government plans to reduce its stake in multinational companies, encourage large local firms to list on the stock exchange, crack down on market manipulation, and reduce reliance on bank loans.

Forward-Looking Policy Initiatives

A significant portion of the MPS is dedicated to outlining ongoing and future reform efforts, particularly within the banking sector.

1. Upholding Good Governance:

BB has proactively dissolved and restructured the boards of directors of 15 banks to restore effective governance and sound management, closely supervising banks that provide daily monitoring indicators.
New regulations, such as the circular on “Transactions with Bank-Related Persons or Institutions” issued on May 8, 2025, impose stricter limits and provisions on credit facilities for bank-related individuals, institutions, and their affiliates to ensure transparency and proper use of funds.

2. Banking Sector Reforms in Bangladesh:

Three specialized task forces have been constituted to steer these reforms, with banking sector reform being a top priority.
- Banking Sector Reforms Task Force (BSR-TF): Leading efforts to strengthen the regulatory framework, improve asset quality, and establish effective bank resolution mechanisms. This includes the Asset Quality Review (AQR) framework and collaboration with international consulting firms like Deloitte LLP (with technical assistance from UK’s FCDO). BB also established the Banking Restructuring and Resolution Unit (BRRU) and finalized the Bank Resolution Ordinance (BRO), 2025.
- Second Task Force: Focuses on strengthening Bangladesh Bank’s institutional capacity and restructuring its operations, with a draft Bangladesh Bank Order 2025 under review.
- Third Task Force: Responsible for identifying, investigating, and repatriating siphoned assets. This task force, chaired by the Governor and coordinated by the Head of the Bangladesh Financial Intelligence Unit (BFIU), works with Joint Investigation Teams (JITs) to prioritize and investigate money laundering cases. They have frozen over 6,500 suspicious accounts and shared over 100 financial intelligence reports. Efforts also include amending the Money Laundering Prevention Act and Rules, and collaborating with international organizations like the Stolen Asset Recovery (StAR) Initiative and the US Department of Justice (USDOJ).

3. Road Map to Managing Non-Performing Loans (NPLs):

The surge in NPLs is a major concern, primarily due to stricter loan classification guidelines implemented from September 2024 and comprehensive guidelines from April 2025.
BB is strengthening the banking sector by updating classified loan reporting, issuing directives on continuous loan renewal, and revising Core Risk Guidelines for the implementation of Risk-Based Supervision (RBS) from January 2026.
A key initiative is the roadmap to implement Expected Credit Loss (ECL)-based loan provisioning by 2027, aligning with International Financial Reporting Standard (IFRS 9). This aims to promote early recognition of credit risks, enhance financial transparency, and ensure banking sector stability.
BB is also developing an Emergency Liquidity Assistance (ELA) Framework to address potential liquidity shortfalls from unexpected deposit withdrawals.

4. Enhancing Financial Inclusion and Cashless Society:

BB prioritizes financial inclusion, focusing on women’s economic inclusion and introducing ‘Digital Microcredit’ facilities at low-interest rates for underprivileged populations, fostering digital banking habits.
The national QR Code standard, ‘Bangla QR,’ has been introduced for low-cost, interoperable retail payments, with 42 banks, 7 Mobile Financial Services (MFS) providers, and 3 Payment Services Providers (PSPs) offering the facility.

5. Asset Quality Review (AQR) and Bank Restructuring:

The BSR-TF has made significant strides in implementing the AQR framework, with 17 banks selected for review in three phases. Phase one (six banks) has been completed by KPMG and Ernst & Young (EY) Sri Lanka.
BB continues coordinating with the World Bank and the Asian Development Bank (ADB) for the second and third phases covering the remaining 11 banks.

6. Bank Resolution Ordinance, 2025 (BRO):

Issued by the President on May 9, 2025, this ordinance empowers BB to initiate a resolution process for non-viable scheduled banks.
The primary objectives are to continue essential banking operations, safeguard depositors’ interests, prevent asset value loss, and ensure financial system stability.
The BRO formally confers resolution authority to Bangladesh Bank, allowing it to execute timely corrective actions and apply resolution tools such as establishing a bridge bank, bail-in mechanisms, purchase and assumption transactions, temporary public ownership, and separation/transfer of assets to asset management companies. BB will also establish a ‘Banking Sector Crisis Management Council’ to address systemic crises and maintain financial stability.

Near-term Macroeconomic Issues and Challenges

While the economy has begun to recover, Bangladesh still faces significant challenges. These include the persistence of inflation, uncertainties associated with the forthcoming election, slowing GDP growth, stagnant private investment, and consistently high levels of non-performing loans. On the external front, export growth may be hindered by tariff shocks. Despite eased geopolitical tensions and subsided global prices, cost pressures from the U.S. tariff-induced nominal depreciation of the Taka could still spur inflation.

Nevertheless, Bangladesh’s economy appears to be turning around and is expected to grow moderately in FY26, driven by sustained growth in the industrial, service, and agricultural sectors. The recovery hinges on favorable domestic conditions, easing election uncertainty, and monetary and fiscal restraint, alongside benign external developments. The recent spike in export earnings and remittance inflows has created a comfortable balance of foreign exchange reserves, which if continued, is likely to generate a sizable reserve cushion soon.

Conclusion

In conclusion, the Bangladesh Bank’s MPS for July-December 2025 is a testament to its proactive and comprehensive approach to economic management. It reflects a firm resolve to maintain a tight monetary policy to combat inflation, ensure exchange rate stability through flexibility, and implement crucial banking sector reforms to restore confidence and long-term stability. While challenges remain, the clear strategies and forward-looking initiatives outlined in this MPS offer a path towards a more stable and resilient economic future for Bangladesh.

Bangladesh Bank MPS for July-December 2025