Economists warn oil surge may raise inflation, interest rates in Bangladesh

Economists fear that the recent surge in global oil and gas prices following attacks on Iran by the United States and Israel could trigger higher inflation and rising interest rates in Bangladesh, potentially weakening business confidence and economic activity.

To assess the potential impact of the conflict, Bangladesh Bank held a special consultation meeting with leading economists. According to sources, discussions focused on four major areas: foreign exchange reserves, the exchange rate, inflation, and the future direction of monetary policy.

Participants warned that rising import costs could force the central bank to depreciate the taka, which would likely push inflation higher. Inflation in Bangladesh already remained above 8.5 percent in January, raising concerns about further price pressure if global energy prices continue to rise.

Economists advised the central bank to maintain a tight monetary policy stance and prioritize protecting foreign exchange reserves. Fahmida Khatun, executive director of the Centre for Policy Dialogue, who attended the meeting, said continuing the current cautious policy approach would be necessary in the current global uncertainty.

Other economists present included M Masrur Reaz, chairman and CEO of Policy Exchange; Mustafizur Rahman, distinguished fellow at the Centre for Policy Dialogue; Mustafa K Mujeri, executive director of the Institute for Inclusive Finance and Development; AK Enamul Haque, director general of the Bangladesh Institute of Development Studies; and Selim Raihan, executive director of the South Asian Network on Economic Modeling.

They noted that while the full scale of the crisis remains uncertain, a prolonged conflict could intensify pressure on Bangladesh’s foreign exchange reserves and the dollar market.

Currently, the exchange rate has remained relatively stable at Tk122.30 to Tk123 per dollar for the past six months. Foreign exchange reserves stood at more than $30.36 billion as of February 26, enough to cover imports for over four months.

A senior Bangladesh Bank official said the central bank is preparing for a possible surge in government demand for dollars due to rising oil import costs. Meeting this demand may require spending a significant portion of reserves or purchasing dollars from the market.

The official warned that adjusting the exchange rate may become unavoidable to sustain reserves, but such a move would likely add further pressure on inflation.

Higher import costs could also increase fiscal pressure on the government, which is already facing funding constraints. If the war continues, the government may need to borrow more, potentially driving up interest rates.

Sources also said Bangladesh Bank has stepped back from earlier plans to reduce the policy rate after strong negative reactions from the market.

The conflict comes at a difficult time for Bangladesh’s economy, as business activity remains sluggish. Private sector credit growth has fallen to a historic low of about 6 percent, while inflation remains elevated.

Md Ezazul Islam, director general of the Bangladesh Institute of Bank Management, said rising oil prices would directly increase imported inflation and worsen global supply chain disruptions.

He argued that cutting the policy rate at this moment would be risky and that the central bank should instead focus on containing inflation.

Ezazul added that high inflation discourages foreign investment, as investors closely monitor price stability before committing funds. He also noted that higher import costs could squeeze liquidity in the domestic market and push up interest rates on treasury bills and government bonds.

While the government hopes to create a more business-friendly environment to stimulate production, he said monetary policy alone cannot achieve that goal.

He suggested that fiscal measures, including increased development spending, will also be necessary to stimulate economic growth.

Economists also warned about the risk of stagflation, a situation in which slow economic growth occurs alongside rising inflation and unemployment.

A Bangladesh Bank research official said that during global supply shocks, production tends to decline while inflation rises. In such situations, central banks often adopt contractionary monetary policy to control inflation expectations.

The official added that policymakers now face a difficult choice between prioritizing economic growth or controlling inflation, and urged caution to avoid the risk of stagflation.

The term stagflation first emerged in the 1960s and became widely known during the global oil crisis of the 1970s, when high oil prices caused both inflation and economic slowdown.

Meanwhile, global central banks are also reassessing their policy outlook as the conflict unfolds. International reports suggest many may delay planned interest rate cuts while monitoring the impact of rising energy prices.

Subitha Subramaniam, chief economist and head of investment strategy at Sarasin & Partners, said prolonged high oil prices could spread into other sectors such as food, agriculture and industrial commodities, ultimately driving broader inflation.

Although inflation has recently eased in the United Kingdom, prompting the Bank of England to cut interest rates earlier, Subramaniam suggested the bank may keep its rate unchanged at 3.75 percent for now.

In the United States, Minneapolis Federal Reserve President Neel Kashkari said it was too early to estimate the conflict’s impact on inflation and interest rates, adding that the outcome will depend on how long and severe the war becomes.

His comments echoed those of Cleveland Federal Reserve President Beth Hammack, who also said it was too soon to determine the inflationary consequences of the conflict.

Global energy prices have risen sharply since the attacks on Iran. Oil prices jumped about 10 to 13 percent immediately after the escalation and later surged by roughly 18 to 25 percent, pushing Brent crude above $90 per barrel, the highest level in more than a year.

Natural gas prices have been even more volatile, with European gas prices rising by up to 40 to 45 percent due to supply disruptions and attacks affecting liquefied natural gas facilities and shipping routes.

Analysts warn that if exports from the Gulf region are disrupted for a prolonged period, oil prices could rise to between $100 and $150 per barrel, significantly increasing global inflation pressures.