The repo rate is the interest rate at which a central bank (like Bangladesh Bank) lends short-term funds to commercial banks. "Repo" stands for "Repurchase Agreement" — commercial banks pledge government securities to the central bank as collateral for borrowing, and promise to buy them back with interest after a set period (usually 1 to 28 days).
When the central bank wants to reduce excess liquidity in the economy, it raises the repo rate. This makes borrowing from the central bank more expensive for commercial banks, who then raise their own lending rates. This makes loans more expensive for businesses and consumers, reducing spending and investment.
Conversely, when the central bank wants to stimulate the economy, it lowers the repo rate. Cheaper central bank borrowing means commercial banks can lower their own rates, making loans more affordable and encouraging spending and investment.
The repo rate is one of the most powerful tools in a central bank's toolkit. In Bangladesh, Bangladesh Bank uses the repo rate along with reverse repo to manage liquidity and control inflation in the economy.