DHAKA, May 8, 2024 (BSS) - Bangladesh Bank (BB) has introduced the Crawling Peg Mid-Rate (CPMR) system for buying and selling of foreign currencies and allowed banks to buy and sell US dollars freely at around Taka 117.

The central bank today took the decision at a meeting of the Monetary Policy Committee (MPC) at its headquarters in the city.

Terming the latest decision of the central bank as workable, former governor of Bangladesh Bank Dr Atiur Rahman said the decision is prudent one and it may help the exchange rate move nearer to the market based exchange rate.

Abdur Rouf Talukder, governor of the BB, presided over the meeting while BB Deputy Governors Dr. Md. Habibur Rahman and Kazi Sayedur Rahman, Economist Dr. Sadiq Ahmed, Director General (DG) of Bangladesh Institute of Development Studies (BIDS) Dr. Binayak Sen and Executive Director of the BB Dr. Md. Ezazul Islam were present, among others.

"In order to bring more flexibility in the foreign exchange market, Bangladesh Bank has decided to introduce a crawling peg system for buying and selling of foreign currencies. Under the new system, CPMR is set at Taka 117.00 per USD.

 BB will keep the new regime in review and will adjust the parameters of the regime as needed. The crawling peg system will be an interim arrangement before moving to a fully flexible market based system in the near future," as per a BB press release.

The crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The method fully uses the key attributes of the fixed exchange regime as well as the flexibility of the floating exchange rate regime.

According to the International Monetary Fund (IMF), crawling pegs are often used to control currency moves when there is a threat of devaluation due to factors such as inflation or economic instability.

At the same time, maintaining a crawling peg imposes constraints on monetary policy like a fixed peg system, it added.

Talking to BSS, Dr Atiur Rahman, former governor of Bangladesh Bank, said, "Both crawling peg mid-rate and raising of policy rate are prudent decisions. The Foreign Exchange Regulation Act clearly provides this flexibility around a given rate and this CPMR reflects that expectation of the foreign exchange Regulation Act ( FERA)," he said, adding that it also provides an indication that this decision may help the exchange rate move nearer to the market based exchange rate.

"Despite some risk of initial turbulence, the exchange rate will stabilize finally at a level which can be sustainable.

 This will also help remove the risk of speculation in the foreign exchange market. The inflation remains a big headache for the central bank and this signal of raising policy rates will hopefully help it lean against the wind.

 Simultaneously, there has to be even deeper coordination between the monetary and fiscal policies to stabilize the economy," he added.

The committee also decided to end the SMART lending rate mechanism.

Now, banks can set the lending rate based on the demand and supply of dollars, according to a circular issued after the meeting.