“The first-round effect will be higher transport, irrigation and distribution costs. The second-round effect is likely to emerge through food prices, services and wage expectations,” said the brokerage firm.
“We therefore expect inflation to face renewed upward pressure in the near term, particularly in categories where distribution and fuel costs represent a significant share of final prices.”
BRAC EPL said higher freight and farm input costs are likely to lift near-term inflation, compress real household purchasing power and soften discretionary consumption.
“For corporates with limited pricing power, higher logistics and utility costs could also press on margins and capacity utilisation,” it said, adding that softer demand, together with higher operating costs, may reduce production volumes and capacity utilisation.
“The effect on aggregate output is likely to be negative in the near term, although the magnitude will depend on the degree of cost pass-through and the persistence of elevated global oil prices.”
The report said the interest rate channel also becomes less supportive. Should inflation expectations rise further, Treasury yields could reverse their recent downward trajectory to preserve positive real returns and sustain auction demand, it said.
“However, ample system liquidity and subdued private credit demand are likely to act as initial counterweights. Corporate borrowing costs could also follow, creating additional headwinds for private investment and working capital.”
The fiscal impact, however, moves in the opposite direction, said the BRAC EPL report.
By narrowing BPC’s losses, the fuel price adjustment should reduce government subsidy and BPC’s financing needs. This, in turn, would ease pressure on government borrowing and improve fiscal flexibility, potentially creating more room for priority spending if the savings are sustained, it added.
The report said improved fiscal dynamics and lower financing requirements are modestly supportive of Bangladesh’s currency, the taka.
“However, a higher oil import bill increases the demand for foreign currency, partially offsetting these benefits,” it said, adding that the price adjustment is likely to provide only modest support to the taka rather than a strong forex tailwind.
“The near-term macro impact is likely to be negative owing to higher inflation, weaker consumption and weaker economic activities,” said BRAC EPL Brokerage Ltd.
The report, however, raised concerns over supply security.
“With Saudi pipeline capacity disrupted and global diesel markets tightening ahead of winter, Bangladesh could face another period of tight fuel availability if replacement cargoes are delayed,” it said.
