Tuesday, November 22, 2005

Raising Interest Rate to Tame Inflation

Raising Interest Rate to Tame Inflation
The economy has been humming along at fast clip, which is good. As people have more money, income higher, they have more disposable income to splash about. Some essential production; food, housing etc couldn’t meet demand because lacking investment to increase production in the previous few years. The result is inflation as demand outstrips supply. Below is BNM statement saying that OCR is going to increase.

Bank Negara seen raising interest rates
By izwan idris
BANK Negara may raise interest rates at the end of the month to keep inflation in check if Malaysia's economic growth picks up in the third quarter.
“We will have a clearer picture after we have the third-quarter performance on what the underlying potential and outlook will be,'' governor Tan Sri Dr Zeti Akhtar Aziz told reporters on the sidelines of an economic conference in Kuala Lumpur yesterday.
“If the slower growth risk diminishes while the rate of inflation remains high, there would be a monetary policy response,'' she said.
Zeti's comments are seen as a hint that interest rates may be on the verge of rising for the first time in seven years and economists expect the increase in the overnight policy rate (OPR), which is now at 2.7%, to be around 25 basis points.
Bank Negara has kept its policy rate unchanged at 2.7% since it was introduced in April 2004.

Within the power of BNM, this is the right move. Hopefully this will be enough to reduce borrowing appetite of Malaysians to buy big ticket items on credit, to cool down the inflation.

Malaysia's consumer price index (CPI), which measures inflation, rose to a six-year high of 3.7% in August but eased to 3.3% in October.
Inflation: any figure higher than 2% is too high. Above 3% is intolerable. People are losing their purchasing power due to high inflation.
While economists say the current inflation rate is tolerable, they note that the figure has more than double since 18 months ago.
Apart from reining in inflation, higher interest rates are also seen by economists as slowing down the outflow of foreign reserves, as it would narrow the “negative carry” in Malaysian and global interest rates. Much of the outflow of foreign exchange reserves has been attributed to hot money leaving the country following the ringgit's timid appreciation against the US dollar following the removal of the peg in July.

Higher interest rates are also seen reducing the negative return on domestic interest rates.
Negative return on domestic rates is like robbing savers and giving the money to borrower. In Malaysian case, most savers are of low income group, workers, pensioners and people who are saving for the deposit of their first home. While the big borrowers are savvy higher income group buying their 2nd, 3rd or 4th homes for investment and corporations are increasing their portfolio of companies. This is akin to robbing the poor to give to the rich.

“The bond market is already pricing in a hike in interest rates and talk is rife around town that an announcement on higher rates could be made when the central releases the third-quarter GDP figures,'' said a fund manager.
Malaysia's gross domestic product (GDP) numbers, together with the quarterly monetary policy statement, are due for release on Nov 30.
One reason for the potential move on interest rates is that Malaysia's economy is expected to have grown faster in the third quarter compared with the 4.1% rise in the second quarter this year.
GDP expanded by 5.8% during the first three months of 2005.
Malaysia would arguably be the last country in the region to raise interest rates as China, Indonesia, South Korea, Thailand and Hong Kong have already done so. Most countries in the region have raised interest rates to keep in check inflation, which has risen dramatically over the past year as a result of skyrocketing crude oil prices.
The US Federal Reserve Board has raised borrowing rates seven times so far this year to curb inflation.

Hot money from overseas flowed to Malaysia expecting Malaysian ringgit to appreciate substantially, speculating to make profit. So far this hasn’t happened. By giving them negative return, this is like taking/robbing money off them. It’s no surprise that this hot money started to flow out. They are tired of waiting and being milked off.
We railed against them when they speculated on the ringgit back in 97/98 and make profit. Now we make profit off them. So it turn out that we are no different.

For Bank Negara statements click here

World Bank: Malaysia good place to invest
THE investment climate in Malaysia is good compared with other middle-income countries, a World Bank report says, but the shortage of skilled workers and regulatory issues need to be addressed quickly to ensure the country remains competitive.
Minister in the Prime Minister's Department, Datuk Mustapa Mohamed, said the World Bank's Investment Climate Assessment, the product of a survey of 1,151 Malaysian companies, offered valuable feedback to the Government on the effectiveness of its policies as well as areas that required refinement.
“The need to upgrade workforce quality and streamline regulatory framework deserves immediate response from the Government,'' Mustapa said in his keynote address at the regional conference on Investment Climate and Competitiveness in East Asia in Kuala Lumpur yesterday.
Mustapa said the Government would continue to place strong emphasis on improving business environment and human capital development.

Here we are, having mismatch in skills base and skills requirement.
“We observed that countries are becoming increasingly aggressive and innovative in securing foreign direct investment (FDI) and in marketing their product and services,'' he said.
Worldwide FDI grew rapidly from the mid-1990s and peaked at US$1.4 trillion in 2000, fuelled by a strong global economy, technology boom and cross-border mergers and acquisitions.
Between 2001 and 2003, FDI eased sharply, but the trend reversed in 2004 when it increased marginally to US$612bil.

Mustapa said the outlook for this year was more optimistic.
“The emerging trends in FDI provide us with the guidance to realign our policies in order to ride this new wave and ensure that our nations remain attractive destinations for investments,'' he told participants at the two-day conference. “While we take measures to improve our respective investment climates, there is a lot we can do as a region.''
FDI in East Asia increased 46% last year, versus 2003, and accounted for 71% of total FDI in Asia.
China was the largest recipient, followed by Hong Kong, Singapore, South Korea, India and Malaysia.
“This conference is important because foreign direct investment will continue to remain as one of the factors determining future growth of income and employment in our respective countries,'' Mustapa said.
The other factor is savings and investment generated locally. Higher savings rate would make it possible for more investment.
The regional conference, jointly organised by the World Bank, Bank Negara and the Economic Planning Unit, provides a platform for discussion on how to design and implement policies aimed at addressing investment climate constraints. International experts, private sector representatives and policy makers from several Asian countries took part in the conference.

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