Bangladesh Bank lets Taka Weaken amid Oil Shock, Reserve Pressure

The Bangladesh Bank has begun allowing a gradual depreciation of the taka against the US dollar from early March, shifting away from its earlier intervention-heavy approach.

The move comes as rising global oil prices, triggered by the Iran war, increase import costs and put pressure on foreign exchange reserves.

The central bank is balancing two key risks—rising inflation and declining reserves. Despite the inflationary impact of devaluation, it has opted to weaken the currency to protect reserves and manage future import payments. Data on the Real Effective Exchange Rate (REER) suggests the taka remains overvalued, giving room for further depreciation.

Since 8 March, the dollar has risen to nearly Tk123 from a long-held level of Tk122.30. Internal exchange rate bands indicate the taka could weaken further toward Tk130 without breaching policy limits. The band system, introduced in December 2024 under an IMF-backed framework, guides market intervention but is not publicly disclosed.

The central bank has halted dollar purchases through auctions and is limiting intervention unless the exchange rate crosses the upper band. Economists, including officials from the Bangladesh Institute of Bank Management, support gradual depreciation to absorb external shocks and maintain export competitiveness.

A weaker taka is expected to support exports and remittance inflows, which may slow due to economic disruptions in the Middle East. However, inflation risks remain, with internal projections suggesting a possible rise of up to 2 percentage points by 2026 under combined oil and currency shocks.

Foreign exchange reserves have already dipped to $29.29 billion. To manage pressure, the central bank plans to seek emergency funding from the International Monetary Fund for fuel imports, alongside a proposed $2 billion credit line.

Overall, the Bangladesh Bank is prioritizing reserve protection and external stability, even at the cost of short-term inflation.

Meanwhile, Taka depreciated to nearly Tk123 per dollar since 8 March, Forex reserves declined to $29.29 billion. Bangladesh Bank to seek emergency IMF support for fuel imports. Further depreciation possible up to Tk130 under policy band.