INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF BANGLADESH

Jan 1, 2007: It appears that Central Bank of Bangladesh has a number of monetary targets. They are
to keep price level within a certain manageable level, economic growth, low level of unemployment,
manageable call money rate (inter-bank interest rate) and so on. Among these, inflation has been
appeared to be the central target of the monetary policy set by the Central Bank of Bangladesh. In
other words, Bangladesh Bank has planned to keep its core inflation (that excludes foods, energy
prices etc) rate at 5 percent ( i.e., mid point of a band of 4 to 6 percent) recently.

Central Bank of Bangladesh in this regard targets the reserve money as the operating target while
broad money (M2) as an intermediate target. Broad money that includes currency in hand, demand
deposit and savings deposit. The broad money (M2) was targeted to grow at 14.2 percent in the
financial year 2005.

The tools that are being used to control money supply are as follows: 1.Repo and Reverse Repo
Auctions 2.Various T bills Auctions, 3. Setting SLR and CRR 4.Bank Rate

Repo and reverse repo transactions are held daily through auctions at Bangladesh Bank. Repo
auctions allow Central Bank to lend fund to financial institutions by purchasing securities, which
financial institution will repurchases upon maturity. In case of reverse repo auctions, financial institutes
purchase government securities from Bangladesh bank upon commitment to sale them back to
Bangladesh bank at a later date at a certain interest rate or price. Both repo and
reverse repo rate auctions are for overnight to seven days maturity.

When there is a high demand for Central Bank money by the financial institutes, they (bidders) offer
(quote) higher repo rate to get the money. Usually higher inter-bank interest rate (call rate) leads to
higher repo rate.

In addition to this, Inter-bank repo transactions is also conducted among financial institutions for
exchanging their securities among themselves. Market force determines the prices of the securities.

In addition to that, SLR (Statutory Reserve ratio) and CRR (Cash Reserve Requirement) tools are
used to control money supply in the economy. SRR is a percentage of TDL (Time and demand liability
or deposit), the financial institutes must hold in the form of securities with Central Bank. CRR is the
cash requirement, financial institutes must hold out of its total SRR. For example, last time Central
Bank of Bangladesh make it compulsory to keep four percent of the mandated 20 percent SRR in
terms of CRR.

When the country heads toward inflation, Central Bank simply increases SLR and CRR to reduce
money supply in the financial system and hence aggregate demand gets squeezed. Due to hike of SLR
and CRR, inter bank interest rate (call money rate) is likely to go up and hence all types of interest
rates prevailing in the country.

Central Bank of Bangladesh also uses Bank Rate to control money supply and interest rate.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF INDIA

August 1, 2006: Central Bank of India maintains few key rates to manage interest rate in the country.
They are repo rate, reverse repo rate and bank rate. We may call them trinity in monetary policy of the
Central Bank.

Repo rate is that rate at which Central Bank of India pumps or lends short term liquidity into the
financial system. During the time of contraction, repo rates are found to be reduced.

Reverse repo rate is the interest rate at which financial institutes park their short term excess money
with Central Bank of India. In other words, Central Bank borrows money at reverse repo rate from the
market. When the economy is in inflation, the Central Bank simply increases reverse repo rate to
reduce money supply in the financial system. With the reduction of money supply in the system,
aggregate spending goes down and hence prices get stable.

Bank rate is another instrument at which Central Bank of India injects money into the system. Bank rate
is not a short term interest rate like repo rate and reverse repo rate. It is a medium term interest rate.

In addition to above instruments, Central Bank also uses Cash Reserve Ratio (CRR), the ratio at which
financial intermediaries must keep their balances with Central Bank. During the heating stage of
economy, Central Bank increases CRR to reduce lending capacity of the financial institutes.

Central Bank of India is named as Reserve Bank of India (RBI) officially.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF USA

May 1, 2006: Key interest rate set by Central Bank is Fed Fund Rate which is inter bank interest rate,
the rate at which one financial institute charges each other over night while short term lending

Instruments to control money supply:

•    Open market operation
•    Discount window lending
•    Reserve requirement

No interest rate operating band is available in the Central Bank of USA like many other Central Banks.

Normally all the financial institutes in the United States change their prime or base lending rate as soon
as Federal Reserve Bank of USA change Fed rate. Not only financial institutes in USA, most of the
Central Banks in the world change their interest rate as soon as the United States changes it.

Indeed Fed rate is the benchmark of the world’s interest rate.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF CANADA

May 1, 2006: Key interest rate set by Central Bank is overnight rate at which one financial institute
charges each other over night while short term lending

There is an interest rate operating corridor available to control interbank interest rate in the money
market. They are:

Bank rate interest - top of the corridor at which Central Bank will give loan to financial institutes (who
are under Large Value Transfer System) for one day.

Deposit interest - lowest corridor at which financial institutes can park their surplus liquidity with Central
Bank  

Overnight rate, the key interest rate is set in between bank rate and deposit rate.

The target of the Bank of Canada is to keep inflation from 1 percent to 3 percent as measured by
consumer price index.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF NEW ZEALAND

May 1, 2006: Key interest rate set by Central Bank is Official Cash Rate (OCR) which is the rate at
which one financial institute charges each other over night while short term lending

There is an interest rate operating corridor available in the Newzealand Central Bank to control inter-
bank interest rate in the money market.

Reserve Bank pays loan to financial institutes at the 0.25 percent higher than OCR against good
security while pays interest at 0.25 percent below the OCR. OCR is set in between deposit and lending
rate. There is no limit of borrowing and lending by Reserve Bank. So the interest rate corridor is 50
basis points wide.

OCR is reviewed eight times a year



INTEREST RATE MANAGEMENT BY THE EUROPEAN CENTRAL BANK

May 1, 2006: Key interest rate set by the European Central Bank is Main Refinancing Rate which is the
rate at which one financial institute charges each other over night while short term lending

There is an interest rate operating corridor available to control inter bank interest rate in the money
market. Deposit rate is the rate at which other financial institute may park their money with ECB while
marginal lending rate is the lending rate by ECB to all financial institutes against collateral.

ECB continue its open market operation to control money supply and targeted money market interest
rate.

The objective of the ECB is to contain inflation close to 2 percent right now.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF MALAYSIA

May 1, 2006: Overnight policy rate (OPR) is the key interest rate set by Central Bank of Malaysia.

The target of Central Bank of Malaysia is to bring OPR close to inter-bank interest rate using its
various monetary tools especially using open market operation

The Monetary Policy Committee is maintaining an interest rate corridor to avoid excess volatility in the
interbank interest rate. To maintain this interest rate corridor, a standing facility is introduced, under
this standing facility; there will be a floor rate (deposit facility) and ceiling rate (lending facility). Deposit
facility will be 25 basis point lower than OPR while lending facility is 25 basis point higher than OPR. So
there exists a 50 basis point interest rate corridor.

Interest rate management system set by Central Bank of Malaysia is similar to Central Bank of New
Zealand.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF NORWAY

May 1, 2006: The sight deposit rate is the key short term money market interest rate of the Central
Bank of Norway.

Central Bank of Norway maintains an interest rate corridor in which short term money market interest
rate fluctuates.

The main target of the Central Bank is to bring stability in Krone exchange rate and also inflation.

The ‘ceiling’ in the interest rate corridor has been the interest rate on banks’ overnight loans and the
“floor” was the sight deposit rate. The difference between the overnight loan (ceiling rate) and sight
deposit rate is normally 2 percentage points since 3 August 1993.

Short term money market rates are usually slightly higher than the sight deposit rate.



INTEREST RATE MANAGEMENT BY THE CENTRAL BANK OF SWEDEN

May 1, 2006: The repo rate is the key interest rate used by Central Bank of Sweden to tackle overnight
interest rate. The repo rate is the rate at which banks receive or pay when depositing or borrowing
funds at the Riksbank for duration of seven days.

The target of the monetary policy is to contain inflation around 2 percent a year with a deviation of 1
percentage point above or below this target.

The Bank has several tools to manage interest rates: They are:

Standing facility: It enables banks to borrow or deposit in Central Bank. The lending rate is a rate at
which Central Bank gives loan is always 0.75 percentage points higher than repo rate while deposit
rate at which central Bank accepts deposit is 0.75 percentages below than repo rate.

Repo rate is always placed at the middle of the lending and deposit rate of the Central Bank.

When the economy is about to face inflation, Central Bank increases repo rate and hence lending and
deposit arte also increases.

Repo rate is reduced to tackle possible recession the economy is heading towards.

Central Bank of Sweden also performs fine tuning operation at the repo rate plus/minus 10 basis points
of the repo rate to stabilize the overnight rate. Fine tuning operation is conducted when banks have
borrowing and deposit requirement at the end of the day.

Central Bank also gives loan to banks under inter-day credit which is interest free by nature but
requires collateral. This credit is provided to settle the payment system of the Central Bank,called RIX.

The Target of the Central Bank is to keep CPI inflation at 2 percent per year.



INTEREST RATE MANAGEMENT BY THE AUSTRALIAN CENTRAL BANK

February 1, 2006:  Cash Rate is the key interest rate set by Australian Central Bank to influence all
sort of interest rate prevailing in the country. The interest rate is set in such a way so that the inflation
rate stays in between 2 to 3 percent.

The Board of the Central Bank of Australia meets eleven times each year to set interest rate or cash
rate. The Central Bank injects into or withdraws money from the financial system in a way so that
overnight interest rate stays close to targeted cash rate.

Cash rate is an interest rate at which financial intermediaries charge each other. Open market
operation is the principle means to control money supply in the economy.    
Interest Rate Management
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@ Sayed Hossain