With inflation running at its highest in nearly 40 years in the US, The Federal Reserve is likely to reduce the brakes on economic growth with monetary policy tightening there.
With the next meeting of the FOMCC scheduled to be held on January 25, 2021, many add that there is already a potential of rate hikes although investment banks have predicted four possible hikes this year beginning in March.
The question uppermost in the minds of Malaysians is would the tightening of the rates, led to Bank Negara Malaysia following the same approach here.
It must be borne in mind that local inflationary pressures are on account not due to excessive demand situations but due to a shortage of supply factors.
Following the global prescription of hiking, interest rates here would be a double whammy, especially as the economy had only started to hum again recently and any potential hike would lead to a dampening of investor sentiment.
It would be at the height of folly to diagnose “rising prices” to be cured with a hike in interest rates just as to treat tuberculosis with a common mixture without studying what had precipitated the problem.
The problem facing Malaysia is increasing prices on account of increasing costs brought about by production shortfall and an increase in the price of outputs.
Having identified that as the problem, how will an increase in interest rates help resolve the present problem but instead require the government to directly intervene in the supply chain factors and find ways to increase productivity.
Considering hikes in the US are inevitable, BNM too may have to follow the same suit but ensure that there is no surge in the outflow of funds and at the same time, keep rates attractive enough to keep the funds here. This would be a tough and delicate balance on the part of BNM, one hand encouraging growth while on the other preventing funds from fleeing. Economists have predicted that there would be a gradual tightening of interest rates in the 2H of this year as inflation continues to inch up. Whatever it is, BNM is set to brace for a situation that would be difficult and delicate. .
