Inflation erodes returns for savers

Investment in savings instruments

Economists advocate raising interest rates to dampen inflation

| Update:
May 21, 2022 4:24:51 p.m.

Savers are losing out as high inflation makes inroads into the returns of savings instruments in which this class of people have invested as a last resort, sources say.

These people, who depend on savings to supplement their income, find it much more difficult to accept that the consumer price index climbs to 6.3% in April 2022, although public perception of the macroeconomic indicator is far superior to the official arithmetic.

Economists fear that rising inflation will mean that the cost of living crisis will continue to tighten over the coming months, especially when energy bills rise in line with recommendations from relevant authorities.

Interest accrued on savings is a maximum of 6.0%. The yield on the risk-free government sanchayapatra remained above 9.0%, but investors’ real incomes also declined due to rising inflation.

The ability to invest in the government savings instrument is believed to be part of the social safety net recipe for sustenance of disadvantaged groups of people, such as the elderly, orphans and widows.

Inflation figures released on Wednesday showed the food index jumped to 340.3. It was 320.3 in April 2021. Inflation in Bangladesh has risen not only due to global market volatility, particularly due to the war in Ukraine, but also disruptions in the domestic supply chain.

The Bangladesh Bureau of Statistics (BBS), the country’s national statistical body, also showed that expensive edible oils, wheat and some vegetables, including brinjals/eggplants, were the main drivers behind the rise in oil. annual inflation between May and April.

There are no anti-inflation accounts available in the country’s banking system for limited income groups. But the central bank recently asked banks to maintain a differential with the inflation rate applicable to term deposits.

But this does not apply to general savings bank accounts which account for about 22% of total deposits in the banking system.

Dr. Masrur Reaz, president of Policy Exchange of Bangladesh, told FE that this situation is called “financial depression”.

“We are now in the negative interest rate regime because inflation has exceeded bank interest rates.”

He points out that the weakness of the local currency against the US dollar is also causing BDT to lose value and believes that it is necessary to increase interest rates to help beneficiaries benefit from savings.

“People trying to save…will see inflation eat into their hard-earned savings faster than it grows, unless they look for the few accounts that can keep pace with inflation,” he said.

Dr. Zahid Hussain, former chief economist of the World Bank, suggests that the interest regime should be flexible and market-based.

He also mentioned that the Bangladesh Bank has recently asked banks to consider the rate of inflation while offering interest rates applicable to FDRs.

Banks, however, cannot raise interest much because there is a maximum restriction on lending at 9.0%. “How much can banks increase interest when their lending limit is limited to 9.0%?”

He also mentions that the BERC has recommended an overall increase in the price of electricity by 57%, which will have an impact on the inflation rate in the coming months.

“Rising electricity prices are contagious and the fallout is happening fast, leading to surges in inflation,” the economist told the Financial Express.

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