Yields on govt securities tumble in Feb: What it means for economy

Interest rates on government securities have seen a significant decline since early February, reflecting a broader trend of lower lending rates in Bangladesh’s financial landscape. As reported, the yields on these securities have dropped nearly two percentage points since December 2024, settling just above 10% this month. This shift can be attributed to a combination of factors, primarily the banking sector carrying surplus liquidity and a notably weak demand for private sector loans.

The Bangladesh Bank interprets this decline in government securities’ interest rates as a positive indicator of economic recovery. After previously struggling with various macroeconomic stresses, these changes suggest a potential shift towards a more stable financial environment. The expectation is that falling lending rates will help curb inflation, lower financing costs, and ultimately encourage investment demand.

In the most recent auction for a five-year bond, the Bangladesh Bank sought to raise Tk4,000 crore at an interest rate initially set at 12.09%. However, banks showed considerable interest, submitting bids totaling Tk22,389 crore, well above the targeted amount. In response, the central bank reduced the interest rate to 10.47% to balance the auction. Similarly, in a 91-day bill auction this month, banks submitted bids that were more than double what the Bangladesh Bank aimed to raise, leading to a cut in the auction cutoff rate from 10.54% to 10.35%.

A senior official from the Bangladesh Bank, speaking on condition of anonymity, expressed that the sharp decline in interest rates on government securities signals the necessity of a downward revision of the policy rate. This sentiment aligns with the broader context of weak private sector credit demand. Due to ongoing political uncertainty, many banks have increasingly favored investing in government securities over lending to private enterprises.

Despite maintaining a policy rate of 10%, it’s anticipated that the central bank will lower this rate soon given the recent trends in government securities. During a monetary policy announcement event on February 10, Bangladesh Bank Governor Ahsan H Mansur did hint at the possibility of a policy rate reduction in alignment with global trends.

Lower interest rates on government securities provide multi-faceted advantages for the economy. By reducing the costs of financing for both the government and private entities, a decrease in interest rates could lend weight to initiatives aimed at curbing inflation. As banks experience diminished yields on government securities, the likelihood of redirecting their focus towards private sector financing should increase, potentially leading to stronger investment demand and an upward trajectory in economic recovery.

The International Monetary Fund (IMF) has projected continued declines in monetary policy rates across major central banks, adding further credence to this optimism. Anticipated reductions in energy commodity prices are also expected to alleviate inflation pressures domestically, suggesting that the Bangladesh Bank might not need to raise the policy rate any further in the foreseeable future.

As liquidity needs from the central bank diminish, it has been observed that many weaker banks have chosen to prioritize deposit gathering instead of traditional lending. Following a significant board reshuffle at 11 weak banks last August, many of these financial institutions have reported improvements in their liquidity positions owing to a recovery in deposit growth.

Md Mehmood Husain, chairman of IFIC Bank PLC, confirmed that his bank had ceased lending to focus on building deposits, which in turn allowed them to successfully navigate their liquidity challenges. He stated that they had begun to resume limited lending from February, given robust deposit inflows.

In addition to improving individual bank liquidity positions, the central bank has provided substantial liquidity support through various mechanisms. The Bangladesh Bank has guaranteed Tk11,100 crore for facilitating interbank transactions and addressing liquidity constraints, with over Tk7,000 crore already utilized under this scheme. Moreover, a special liquidity support amounting to Tk23,500 crore has also been allocated for banks facing operational liquidity issues, with nearly Tk17,000 crore already deployed.

Overall, banks’ excess liquid assets have increased by Tk19,000 crore over the past six months, reaching Tk2.15 lakh crore by the close of December 2024. This sweeping improvement signals a positive trend in the financial sector, suggesting increased stability and a renewed focus on stimulating economic growth.

In conclusion, the significant drop in yields on government securities throughout February indicates a turning tide in Bangladesh’s economic landscape. With expectations pointing towards potentially lower lending rates, there exists a tangible opportunity for enhanced investment demand, a reduction in inflation, and continued economic recovery. As these trends unfold, both businesses and consumers alike may soon experience the benefits of a more accessible and responsive financial environment.

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