Rate hike is only one of the measures to tame inflation. The government needs to simultaneously formulate other policies to expand the economic cake in cushioning the impact of inflation triggered externally.
As widely expected, Bank Negara raised the OPR by another 25 basis points to 2.25% on Wednesday, after a surprising 25 basis point increase barely two months earlier. This brought the interest rate gradually back to pre-pandemic levels and marked the first consecutive rate hikes by the central bank in 12 years.
As the country makes its transition to the endemic phase of Covid-19, restrictions on many economic sectors have been lifted, allowing the anaemic economy to robustly grow once again.
Unfortunately, as a consequence of Russia’s invasion of Ukraine which has badly disrupted global supply chains, coupled with the drastic rate hike by the Fed, the entire world is swept by a powerful wave of inflation, spelling doom for Malaysia’s economic development.
The historically low 1.75% interest rate is no longer pertinent now because excessively low interest rate does not augur well for the country’s economic development as it slowly picks up steam from a depression.
The current OPR is still lower than the pre-pandemic levels of 3.0-3.25%, and further rate hike is widely expected by the market come September.
The central bank has earlier hinted that it will take further actions to bolster economic expansion while stabilising goods prices.
Bank Negara has said any adjustment made to the country’s monetary policy in future will be carried out progressively and with restraint to make sure the monetary policy remains loose on the back of price stabilisation so as to bolster sustainable economic development.
Bank Negara has sent out a clear message that Malaysians must spend more prudently in the midst of rising goods prices, as higher OPR implies that commercial banks will soon revise their rates upward, meaning it is time to start saving.
Those putting their money in FDs can look forward to higher returns while the diminished liquidity helps stem unchecked price increases.
The central bank’s move is meant to arrest further devaluation of the local unit against the greenback, keeping imported goods and materials within manageable levels so that businesses do not need to transfer the additional cost to the consumers.
On the flip side, higher OPR also denotes increased mortgage interest rates, and this will add to the burden of people having to service their monthly housing and car instalments.
We know that higher interest rate will boost foreign capital inflow which in turn helps lift the ringgit.
Unfortunately, even the consecutive rate hikes have failed to lend support to the ringgit given the prevailing strength of the US dollar.
As such, even if a rate hike was widely expected, market reactions have been polarised.
The principal goal of a rate hike is to check price increases, but such a move may not achieve the desired result if people keep spending indiscriminately.
The situation at this moment is such that goods prices have gone up because of the additional cost of doing business, and higher interest rate will only exacerbate the debt burden of local companies.
Meanwhile, the country has managed to keep inflation rate low because of generous government subsidies, and raising the interest rate may therefore not effectively tame the inflation.
While the rate hike may help bolster the ringgit, its effect on suppressing inflationary pressure is yet to be seen.
Some local economic analysts opine that even though the national economy is now recovering, they have reservations about its long-term sustainability, and as such, the central bank should allow more time for economic growth to stabilise before making the decision of raising the interest rate.
Currently the country’s economy is still at the early stage of recovery and the government should offer its support. Moreover, the financial market is still quite stable at this moment and there’s no point putting it under any risk.
While boosting domestic savings and luring more foreign funds into the country, it is essential for the local financial market to improve its efficiency.
Rate hike is only one of the measures to tame inflation. The government needs to simultaneously formulate other policies to expand the economic cake that will be shared equitably by all Malaysians in cushioning the effects of inflation triggered externally.
Additionally, the government should also strive to map out healthy and fair trade policies and implement macroscopic economic policies to spearhead an all-rounded economic development.
As for food production and supply, the government will need to more proactively promote agricultural production other than cash crops in a bid to produce more food and slowly wane the country from perennial food imports towards the ultimate goal of self sufficiency.