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Monetary policy: Where art thou?

THE Malaysian ringgit is continuing its downward trend to be at a new lowest value in 24 years (as of Sept 26).

At the end of today’s trade, the ringgit (MYR) is quoted at RM4.6030 to an American dollar (USD). Technically, it is not something unexpected as the local currency has long broken the psychological barrier of RM4.50 for every US$1 much earlier in September.

Economists are forecasting the ringgit to slide further, to as much as RM5 to a dollar by year-end, as the US Federal Reserve (Fed) is expected to continue its aggressive tightening, increasing the attractiveness of the USD and pressuring the value of other currencies.

In fact, after raising its interest rates by 75 basis points (bps) last week to between 3% and 3.25%, the Fed chairman has already indicated that the central bank could increase it by another 150 bps by the middle of next year.

At the same time, the Malaysian economy is also facing an upending effect of rising inflation, a global trend with effects as universal as the Covid pandemic.

Domestically, as projected by Bank Negara Malaysia (BNM), inflationary pressures remain high due to elevated commodity prices and a tight labour market. Even though the average headline Consumer Price Index (CPI) remains at a moderate 2.8% to date, it spiked to 4.7% at the end of August, driven mainly by food prices which surged to 7.2%, the biggest jump recorded by the food index in 14 months.

The central bank, therefore, continued to increase the interest rate as one of the policy tools to manage inflation. On Sept 8, for the third time this year, the Monetary Policy Committee (MPC) of BNM increased the Overnight Policy Rate (OPR) by 25 basis points to 2.5%. It is expected to rise further, to manage the projected increase in inflation.

The question here is, why is there still a need to use the interest rate, which has proven to be ineffective against inflation driven by supply constraint, to counter the bubbling inflation?

Economies around the globe have acknowledged that the current global inflation is the inevitable consequence of the Ukraine war, due to the direct effect of the conflict as well as the indirect effect of sanctions against Russia.

Both countries represent approximately a quarter of global wheat exports, nearly a fifth of global corn exports and approximately 80% of sunflower oil exports worldwide. A squeeze in the supply chain would put a serious dent into the already tight market recovering from the pandemic, let alone a major disruption to among its biggest producers.

Making things worse, Russia supplies approximately 13% of the world’s fertiliser, unwittingly putting the global agriculture supply chain under more pressure.

Russia is the world’s third-largest oil producer, behind only Saudi Arabia and the US. The global crude oil price, which was hovering below US$100 per barrel prior to the Ukraine war in February, surged to US$120 per barrel in four months.

Moscow is also home to around 40% of palladium mining, 10% of titanium and, together with Ukraine, about 15% of global titanium produce. Disruption to the supply of these minerals adds to the existing supply chain problem, creating prolonged shortages in industries such as automotive and telecommunication, and keeping prices high.

These are the determining factors that fuel global inflation, not the typical demand outstripping supply situation that sets economists to frantically launch interest rates into orbit.

Malaysia’s household debts stand at 89% of the GDP, making us among the highest in the region. An increase in interest rate will hit Malaysians dearly, since repayment costs for existing loans will be much higher, and will definitely drive down consumer sentiment.

Wouldn’t a negative consumer sentiment result in slower economic growth, which in turn would be damaging to a recovering economy, which is where Malaysia is at now?

On paper, Malaysia may be registering an impressive growth of 8.9% in the second quarter of the year, but, as the BNM governor herself said, the recovery rate among sectors varies as some are broader-based and many are still reeling from the lockdown impact.

Given that the national economy is very much dependent on domestic demand, wouldn’t that be throwing a spanner in the works? Is there a real necessity to curb inflation, considering that it is driven by supply constraints?

The problem is obviously in the supply. The solution with the interest rate is to curb demand. How will that work?

And how will that arrest the decline of MYR when the global funds will gravitate towards the aggressive and much more alluring USD anyway?

What is the current economic policy for Malaysia? Do we want to encourage growth? Or do we want to contain growth?

Why would we want to contain growth, while it is still fragile and edgy?

Maybe these should be the questions to be addressed by the MPC when it convenes for its next meeting in November, rather than the expected regular announcement to yet increase the OPR by tens of basis points.


Asuki Abas is the editor of The Malaysian Reserve.


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