Central Bank governor Tan Sri Nor Shamsiah in her keynote address at the Khazanah Megatrends forum painted an illuminating picture of Malaysia’s economic footing and the fragility of it if abrupt policies introduced without cohesive strategies made with the financial body.
In her remark, the governor said the Malaysian economy is on a stronger footing today. Given this, the Monetary Policy Committee (MPC) had decided to recalibrate the level of monetary accommodation, gradually adjusting the overnight policy rate (OPR) in May, July, and September this year. At the current level, the OPR continues to be accommodative and supportive of economic growth.
She reminded, during the pandemic, the OPR reached a record low of 1.75%. Amid lockdowns and border closures, this was necessary to support the economy. The economy was in the ICU, and so intensive treatment was needed then. Since the economy is now back on a strong footing, and the level of unprecedented support is no longer necessary, nor desirable. It is important to remember that there is a cost to keeping rates too low for too long. As has clearly seen in other countries, this leads to distortions, and imbalances fuels inflationary pressures and weaken their currencies.
Given the highly dynamic operating environment, Shamsiah said the MPC, in formulating monetary policy continues to carefully assess evolving conditions and their implications on the overall outlook for domestic inflation and growth. This is reflected in the mandate where Bank Negara is entrusted to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. Hence, the MPC is not constrained by a pre-determined path for the OPR. Adjustments to the OPR by the MPC will be done in a gradual and measured manner. Being pre-emptive, as BNM has, allows the Bank the room to calibrate monetary policy in a more measured manner.
Adding it is especially important in this highly uncertain and volatile operating environment. Shamsiah said abrupt actions by policymakers and the authorities can have outsized impact on markets and the economy. This will undermine not only the effectiveness of the policy itself but also the credibility of authorities and market confidence. Indeed, having well-coordinated policies will not only help the country to ride out current storms but also lay the ground for the economy to emerge stronger and more resilient.
The market turbulence seen last week in one of the advanced economies is an example of why this is so important. Effective coordination of monetary and fiscal policy is important to contain demand pressures and manage market confidence.
