Strong ringgit to benefit consumers and retailers

  • Business
  • Wednesday, 22 Mar 2006

PETALING JAYA: Economists say a strong ringgit could prove to be a boon for consumers and retailers alike, but differ on how much the central bank should allow interest rates to rise to cope with inflation. 

Standard Chartered regional economist Joseph Tan said for the ringgit to sustain its strength against the dollar and other regional currencies, particularly to check import-inflation, Malaysia would do well to increase interest rates by at least another 25 basis points. 

“Malaysia is behind other regional central banks in raising rates. If inflation stays at 3.3% year-on-year and if the Overnight Policy Rate (OPR) is at 3.75%, we have a real return of only around 0.45%,” Tan told StarBiz

This, he added, was an insufficient buffer should inflation unexpectedly increase. 

“To effectively contain inflation, especially after the recent fuel price hike, we believe that market view on interest rates would shift to a cumulative 75-100 basis points hike this year,” he said, adding that Standard Chartered reiterated its call that OPR would be raised to 4% by July. 

ECM Libra chief economist Wong Chee Seng, meanwhile, disagreed that interest rate increase was the best solution to curbing inflationary pressure, but said a sustained ringgit strengthening would be a more effective measure. 

“A strong ringgit increases the purchasing power of Malaysians. Interest rates rises, on the contrary, naturally increase the base lending rate as well, which could be a burden on the people following the petrol price hike,” Wong said. 

He said that a higher base lending rate would squeeze the profit margins of businesses and reduce production, and an increase in demand would then result in even higher inflation. 

It would also be interesting to note what Bank Negara would do should speculative play with the ringgit entered the picture, he added. 

RAM Consultancy Sdn Bhd chief economist Dr Yeah Kim Leng was of the view that the exporting power of the Asian economies would not be affected as these countries still offered lower labour costs and price competitiveness, despite cumulatively stronger regional currencies. 

“The ringgit appreciation is useful in mitigating inflationary pressure by lowering import costs. It also allows Bank Negara some latitude to defer another interest rate increase.  

“This could avert a sharp slowdown in local demand and growth,” he said, adding that interest rates would probably increase to 4% by year-end. 

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