Bangladesh's central bank left its benchmark interest rate unchanged at 10% on Tuesday, signalling it will maintain a tight monetary policy stance as it prioritises bringing down inflation despite slowing economic growth and rising global risks.

In its monetary policy statement, the central bank warned that escalating conflict in the Middle East could disrupt supplies of oil and fertiliser, fuelling imported inflation and posing fresh risks to the country’s recovery.

While the economy is showing signs of gradual improvement, it continues to face significant challenges, including high levels of non-performing loans, weak private investment, energy supply uncertainties and external vulnerabilities, the central bank said. The government is targeting economic growth of 6.5% and inflation of 7.5% in the fiscal year ending June 2027.

The decision underscores policymakers' determination to curb inflation even as economic activity remains subdued. Headline inflation has fallen from a peak of 11.7% in July 2024 to 9.4% in May 2026 but remains well above the official target.

"Bangladesh Bank will sustain its contractionary monetary policy stance through the first half of the current fiscal year to rein in headline inflation and anchor long-term inflation expectations," the central bank said.

However, it cautioned that tight monetary policy alone cannot fully tackle inflation driven by structural inefficiencies and supply-chain bottlenecks rather than excess demand, highlighting the limits of interest rate tools.

Private-sector credit growth slowed to 5% at the end of May as banks remained cautious amid rising bad loans and increased government borrowing, the central bank said. It added that surplus liquidity has increasingly flowed into government securities rather than business lending.

The central bank also highlighted its previously announced 600 billion taka ($4.9 billion) stimulus package for industry, agriculture and small and medium-sized enterprises, saying it was intended to ease the credit crunch, revive industrial output and create around 2.5 million direct and indirect jobs.