A liquidity trap is an unusual economic condition where interest rates have fallen to near zero, yet people and businesses still prefer to hold cash rather than invest or spend.
When this happens, monetary policy becomes ineffective. There's no room to cut rates further, and even increasing the money supply doesn't encourage spending.
In a liquidity trap, economic growth stalls, unemployment may rise, and there's a risk of deflation. Japan was famously stuck in a liquidity trap from the 1990s for an extended period.
In Bangladesh, a liquidity trap scenario hasn't been observed directly, as interest rates remain relatively high compared to developed economies.