Monetary policy has to reflect state of economy

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid

PETALING JAYA: The monetary policy has to reflect the state of the economy and not be static, while Bank Negara’s role must be seen as independent to allow some space to intervene when necessary, says an economist.

Employees Provident Fund (EPF) head of economics and research Mohd Afzanizam Abdul Rashid said keeping the overnight policy rates (OPR) too low for too long could lead to more imbalance, as people could actually be gearing up more excessively.

“People need to understand why there is a change in the 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 activity during Covid-19 in 2020, we saw the OPR being brought down from 3% to as low as 1.75% 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 activity, these rates have to be adjusted.

The reopening of the economy and international borders really helps to resuscitate economic activity, he said, and certainly the OPR of 1.75% does not run really well with the level of economic activity.

“Looking at the first nine months of Malaysia’s gross domestic product (GDP) last year, which was growing at a rate of more than 9%, the OPR has to move along the state of the economy to trend higher.

“But when there are calamities going forward such as the talk about a 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 the OPR or any other policy rates across the globe,” he explained.

On another note, he said people also tend to associate a 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 an OPR that has been left low for a long time is bad for the economy.

“Discussions on the OPR have always been one-sided, that is from the point of view of the borrower. The OPR affects everything, not just lending rates, but also deposit rates.

“What about those who want to save their money and seek investments that provide good returns and at the same time have a reasonable risk tolerance?

“Deposits are a very decent kind of investment vehicle for the typical man on the street,” he said.

People also need to understand the nature and meaning of the 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 the Credit Counselling and Debt Management Agency (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.

Bank Negara has been very prudent in managing its monetary policies compared to the United States and the European Union (EU), which are more aggressive.

Commenting on this, Mohd Afzanizam said the rapid adjustments by the United States and the 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 Bank Negara’s policy adjustment is very gradual.

“Bank Negara’s OPR adjustment is less surprising compared to the Federal Reserve, which is very aggressive. As it is, there is still talk that the United States might further raise interest rates,” he said.

The OPR, he said, has been hovering around the 3% to 3.25% range when the economy is in the absence of shocks or any recession as seen prior to the Covid-19 period in 2009.

“Bank Negara is now trying to revert to its normalised rating. We are now at 2.75%, 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 Bank Negara 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 keeping the OPR at a low level as the ability to intervene will become limited,” he said.

As for the ideal rate, Mohd Afzanizam said it was very subjective, but based on historical standards, 3% to 3.25% seemed to be fair.

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 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 the GDP, with private consumer spending growing at a double-digit pace giving the sense that the demand-pull inflation had 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, were government roles such as to control transport subsidies and look into malpractices among businesses such as hoarding and price manipulation.

In general, inflation had gradually come down to 3.8% in December from 4% in the previous month, and hence, he believes the central bank had actually exhibited credibility in helping 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%. My worry is people might be over-lavish and might excessively go into higher household indebtedness,” he opined.

He also said that inflation essentially was a very complex issue and not just one particular policy could 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 would require wide-ranging areas of consideration as it covered education, industrial policies, bringing in more high-quality foreign direct investment, ensuring a business-friendly tax regime and, more importantly, allowing 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 execution,” he added.

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BankNegara , policy , GDP , recovery , OPR , inflation


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