Bangladesh Bank (BB) must take measures to prevent "second-round effects" of inflation, according to the International Monetary Fund (IMF).
"Even though much of the recent increase in inflation was supply-related, given earlier increases in inflation, we think it's important for the central bank to prevent second-round effects," said IMF Asia-Pacific Department Deputy Director Thomas Helbling during a press conference in Tokyo on 1 November.
The official transcript of the conference was released on Tuesday (12 November).
Second-round effects of inflation refer to the scenario where initial price hikes lead people to anticipate continuing inflation, prompting workers to demand higher wages and businesses to further increase prices.
This cycle of rising wages and costs makes controlling inflation more challenging and risks embedding it within the economy.
Helbling noted that inflation has remained high in Bangladesh for a considerable period, consistently above nine percent since March 2023, despite gradual policy rate hikes.
Inflation reached 10.87% in October due to soaring food prices, especially staples such as rice and vegetables.
"In terms of monetary policy, yes, monetary policy tightening helps and is needed. So, the recent increase in the repo rate was a step in the right direction," Helbling added.
In its recent economic outlook for the Asia-Pacific region, the IMF projected that inflation in Bangladesh would rise further during the current fiscal year.
Helbling attributed this upward revision mainly to labour unrest and severe floods, which caused significant economic and supply-side disruptions.
Addressing a query on whether it was appropriate for the interim government to seek budgetary support from development partners and the potential effects on the economy, Helbling remarked that economic unrest and related disruptions had also impacted the balance of payments, particularly in terms of external financing.
"The budget loans provide some breathing space. They also offer the interim government an opportunity to formulate policy reforms and gain time," he said.
"Specifically, fiscal policy should support monetary policy and contribute to external stability by tightening overall. At the same time, fiscal policy must be rebalanced to maintain capacity to support the poor and continue developmental initiatives," the IMF official further said.
