THE global economic recovery is still too fragile for a round of rate tightenings, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said.
“It appears that rates have bottomed out in the major economies and discussions have begun to shift to the debate on the need to raise interest rates in the future,” she told a Morgan Stanley investor conference in Singapore.
“At this juncture, a premature increase in interest rates, when inflation is low and unemployment remains high and when there is excess capacity, would have implications on the growth momentum,” she said.
The central banks of Australia and Britain, two countries whose rapidly rising house prices have concerned policy makers, raised interest rates last week.
Zeti noted the rate rises, and said there was a growing focus on the role of monetary policy in controlling asset prices, something she thought was misguided.
“Arguments against this...are that interest rates would need to rise to prohibitive levels to rein in asset price inflation effectively,” she said. “Indeed, such a course of action would have damaging implications on the economy and financial systems.”
Slower growth could disrupt economic reforms in some nations, she said, recommending instead such policies as changes in prudential regulations and government spending and taxation to target asset bubbles.
Malaysia had followed this path in 1995/96, including raising the capital gains tax, and had headed off a property price bubble, she said.
Shifts in Asian exchange rates, something European and US officials have been pressing for as a means of correcting the global trade imbalance, were unlikely to occur, Zeti said.
“This would only take place if the dominant driver of exchange rate movements are trade flows and not financial flows,'' she said. – Reuters
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