Monetary policy has to reflect the state of the economy and not be static - Economist
25 Jan 2023 11:14am
Monetary policy has to reflect the state of the economy and not be static
Employees’ Provident Fund (EPF) head of economics and research Dr Mohd Afzanizam Abdul Rashid said keeping overnight policy rates (OPR) too low for too long could lead to more imbalances as people could actually be gearing up more excessively.
"People need to understand why there is a change in monetary policy stance and the need to reflect on the state of the economy that they are in.
"If you notice that when we experienced a sharp fall in economic activities during Covid-19 in 2020, we saw the OPR was brought down from three per cent to as low as 1.75 per cent in less than a year.
"This is simply because the central bank wanted to help the economy. By bringing down the rates, that would mean the cost of goods became cheaper and would stimulate the economy via investment and consumption,” he told Bernama.
However, Mohd Afzanizam noted that after the economy started to recover with signs of convincing economic activities, these rates have to be adjusted.
The reopening of the economy as well as the international borders really helps to resuscitate economic activities, he said, and certainly OPR of 1.75 per cent does not run really well with the level of economic activities.
"Looking at the first nine months of Malaysia’s Gross Domestic Product (GDP) last year which was growing at a rate of more than nine per cent, the OPR have to move along the state of the economy to trend higher.
"But when there are calamities going forward such as the talk about recession, there is a case and it is quite common that central banks will come in and cut rates again. That is the nature of OPR or any other policy rates across the globe,” he explained.
On another note, he said people also tend to associate higher OPR with the rising cost of living and there seemed to be a convolution of information or misunderstanding of how things should be looked at.
People need to understand that the OPR that has been left low for a long time is bad for the economy.
"Discussion on OPR had always been one-sided which is from the point of view of borrowers. OPR affects everything, not just lending rates, but also deposit rates.
"What about those who wanted to save their money and seek investments that provide good returns and at the same time have a reasonable risk tolerance? Deposit is a very decent kind of investment vehicle for a typical man on the street,” he said.
People also need to understand the nature and meaning of OPR. He thinks they need to differentiate between the issues relating to financial literacy in terms of their personal finances.
"The central bank has been very forthcoming. I mean, an agency such as Agensi Kaunseling dan Pengurusan Kredit (AKPK) really helps people with financial difficulties.
"If someone is having difficulties to service their debt, I think AKPK is the platform for them to reach out to and how they can actually address their financial difficulties,” he said.
Pace of Interest Rate Hikes
BNM has been very prudent in managing its monetary policies compared to the United States (US) and the European Union (EU) which are more aggressive.
Commenting on this, Mohd Afzanizam said the rapid adjustment by the US and EU were coming from very a low base policy rates of almost zero or in the case of Europe, they are in negative interest rate regimes and their move now means reverting back to a more normalised region.
"Of course, the adjustment has to be very quick and especially in the case of the US economy, when there are signs of economic overheating and warrants such a policy response. But it is a different case in Malaysia, where BNM’s policy adjustment is very gradual.
"BNM’s OPR adjustment is less surprising compared to the US Federal Reserve, which is very aggressive. As it is, there is still talk that the US might further raise interest rates,” he said.
Malaysian OPR, he said, has been hovering around the 3.00-3.25 per cent range when the economy is in the absence of shocks or any recession as seen prior to the Covid-19 period, in 2009.
"BNM is now trying to revert to its normalised rating. We are now at 2.75 per cent, probably another 25 basis points may not be too much of a hassle for economies to take in terms of the impact.
"It is also a good and prudent move for BNM to build its policy space, since we are talking about the incoming recession risk in the developed market. If there is a need to intervene and cut the rate again, at least it has more resources to do that, as opposed to keep OPR at a low level as the ability to intervene will become limited,” he said.
As for the ideal rate, Mohd Afzanizam said it is very subjective but based on the historical standards, 3 per cent to 3.25 per cent seemed to be fair.
Tackling Inflation
Touching on measures to address inflation, Mohd Afzanizam said there are many policy options and one of them is monetary policy, which is governed by the central banks.
He said central banks will look at inflation in a very aggregate manner, among which are the demand dynamics and the nature of the supply chain imbalances to assess the situation.
He also shared that the demand condition was very strong last year on the back of the high growth in GDP with private consumer spending growing at a double-digit pace giving the sense that the demand-pull inflation has become more prevalent.
When it comes to demand conditions, the monetary policy could play its role to actually bring down inflation, he said.
Other options, he noted, are the government roles such as to control transport subsidies, to look into malpractices among businesses such as hoarding and price manipulation.
In general, inflation has gradually come down to 3.8 per cent in December from four per cent in the previous month, hence he believed the central bank has actually exhibited credibility in helping assist to control inflation.
"However, I think consumer spending is still too robust by looking at the trend of our consumer spending with the OPR at 2.75 per cent. My worry is people might be over lavish and might excessively go into higher household indebtedness,” he opined.
He also said that inflation essentially is a very complex issue and not just one particular policy can totally address it.
It varies on how societies adjust to this new rate environment depending on how highly indebted they are to cope with the situation of higher borrowing costs, he said.
On the policy to increase wages to cope with the rising cost of living, he said this will require wide-ranging areas of consideration as it covers ways of education, industrial policies, bringing in more high-quality foreign direct investment (FDI), ensuring a business-friendly tax regime and more importantly to allow predictable business conditions.
"Ultimately, it is about how to be better and more prosperous, so we would require a whole range of policies to be effective in the executions,” he added. - BERNAMA
