What is the policy rate?
Banks sometimes need cash at short notice. They can then borrow for a short period from the central bank, Bangladesh Bank, by pledging government bills and bonds. The interest rate on this borrowing is the policy rate. In Bangladesh it is known as the “repo rate”.
The policy rate is not the rate ordinary people pay or earn. But banks’ own cost of getting money moves with it, so over time deposit and loan rates move the same way. That is why it is called the “anchor” of a country’s interest rates.
Think of a shopkeeper at the bazar who buys rice wholesale and sells it retail. If the wholesale price rises by Tk 5 a kilo, the retail price goes up within days; if it falls, retail prices drift down. The policy rate is something like the “wholesale price” of money. When it changes, banks’ “retail” rates, that is FDR and loan rates, follow in the same direction, even if with a delay.
Why it matters to an investor
- To understand deposit rates: after the policy rate rises, FDR and DPS rates usually rise too, and when it falls they slowly come down.
- To understand borrowing costs: on loans with a variable rate, the instalments can rise or fall along with the policy rate.
- To understand bond and treasury bill returns: yields on new bills and bonds stay close to the policy rate, and when it changes, the prices of bonds bought earlier change too.
- To read the news: hearing “rates went up” or “rates were cut” tells you what the central bank thinks about inflation and growth.
How it works in Bangladesh
Bangladesh Bank’s Monetary Policy Committee meets regularly to set the policy rate and announces it with the monetary policy statement. The main aim is to keep inflation under control, while also keeping an eye on growth and financial stability.
Around the policy rate sits a “corridor”. The upper edge is the Standing Lending Facility (SLF): the rate at which banks can borrow from the central bank. The lower edge is the Standing Deposit Facility (SDF): the rate banks earn on spare money parked with the central bank. So the rate at which banks lend to each other usually stays between these two edges.
How it has changed since 2020
During Covid, in July 2020, the policy rate was cut to 4.75%, where it stayed until May 2022. Then, as inflation rose, it was raised in several steps from May 2022, reaching a record 10% in October 2024.
From 2 August 2026 it was cut to 9.5%, the first cut in about six years, with the SLF at 11% and the SDF at 7.5%. The September 2026 policy statement kept it unchanged. These figures change over time; Bangladesh Bank publishes the latest rate.
The effect takes time to arrive
- Interbank (call money) rates and treasury bill yields move first, then FDR and loan rates follow slowly.
- The effect on household spending, business investment and finally inflation usually takes from several months to a year or two.
- The policy rate is not the only lever: the exchange rate, government spending and world commodity prices all play a big part in inflation too.
Worked example
- Say you have a variable-rate loan of Tk 10,00,000 at 12% a year. Interest in the first year is roughly Tk 1,20,000.
- After the policy rate rises, the bank raises the loan rate to 14%. Interest is now roughly Tk 1,40,000 a year.
- The extra cost is about Tk 20,000 a year, or about Tk 1,670 a month. On the other side, the interest on a Tk 10,00,000 FDR may rise over the same period. The numbers are only an example.
Result: even a small change in the policy rate moves both borrowers’ costs and savers’ income, in opposite directions. Banks’ rates do not change by exactly the same amount as the policy rate.
Common mistakes
- Thinking that if the policy rate rises by 1%, your FDR or loan rate changes by 1% the next day. Changes come slowly, and not by the same amount.
- Taking the policy rate to be your own FDR rate. It is the rate between banks and the central bank.
- Being pleased by a higher interest rate without checking what inflation is at the same time.
- Assuming that because rates moved once, they will keep moving the same way.
The policy rate is the “wholesale price” of money: when it changes, deposit, loan and bond rates move the same way over time.