Two points are relevant in the context of Bangladesh's high REER.

(1) The 'Balassa-Samuelson effect' (1964) describes how fast growth, in wages and productivity, in a tradable sector, eg Bangladesh garments, can appropriately drive higher inflation across the economy and lead to FX rates which appear expensive on a REER basis. That may partly explain the persistent over-valuation versus REER observed in Bangladesh.

(2) Separately, in the absence of a credible domestic policy anchor for inflation, the maintenance of a stable exchange rate can help anchor inflation expectations.

Despite these two factors the extent of over-valuation is a potential cause for concern should current account balance worsen, eg due to a slowdown in garment export growth or remittances, or an escalation in the cost of imported items such as fuel or food.