PETALING JAYA: Complementary tools besides monetary policy is needed to control inflation, say economists, who believe that interest rate hikes by themselves may be ineffective to combat rising prices.
A holistic approach would be to coordinate monetary policy with all the requisite tools like targeted fiscal policy, targeted subsidies or tax breaks, and anti-profiteering and price ceiling measures to ensure consumers are not overburdened by higher prices.
Monetary policy only addresses the demand side of inflation but not the supply side or when supply shocks impact the market.
Based on Bank Negara’s estimates, an interest rate increase can take up to two years to fully affect inflation.
This delay means prices may continue rising for a while before stabilising, making it hard to limit increases in households’ cost of living, the central bank said.
Sunway University professor of economics Yeah Kim Leng said to contain inflation and cost of living successfully, these monetary policy interventions need to be coordinated with other policies such as fiscal, industrial, trade and investment policies.
Sunway University professor of economics Yeah Kim Leng“For example, to alleviate persistent high food prices, fiscal policies aimed at increasing food production and productivity will help to alleviate supply shortages.
“Similarly, competition policies that dismantle monopolies and cartels and promote competitive markets will lead to greater efficiency gains that translate into lower prices,” he said.
He added the government’s high social spending coupled with targeted subsidies and tax reliefs were helpful for middle and low-income households to cope with inflation and cost-of-living issues.
He said policies generating high wage employment as well as enhancing productivity and skill levels to raise incomes faster than price increases were as important.
“The long-term antidote to inflation is to ensure supply capacity rises in tandem with the growing demand.
“This is achieved in a healthy economy where wages rise in tandem with productivity increases and the government revenue-expenditure gap is small, while income inequality is kept in check through progressive taxation and a more equitable labour share of income,” Yeah said.
RAM Rating Services Bhd senior economist Woon Khai Jhek said cooperation and discussion between the government and Bank Negara would ensure the appropriate tools were employed to manage price levels and inflation.
“The overnight policy rate or OPR is a blunt policy tool and is more effective in stamping out demand-pull inflation.
“However, when inflation stems from supply-side constraints or external shocks, interest rates are not the best tool and fiscal policy, and targeted interventions become more important,” he said.
“For example, fiscal measures and targeted intervention such as tax breaks and import measures can alleviate structural bottlenecks in the economy, helping to improve supply chain and stimulate production.
“Some other measures the government has implemented in the past include anti-profiteering regulations, price ceiling measures and price control measures, which have been effective at keeping a lid on inflationary pressures and discouraging any unwarranted or sharp price hikes in the market,” he said.
Woon said a proper plan can mitigate the impact of subsidy reforms on the economy, which would include inflation.
The central bank projects headline inflation for this year to average between 2% and 3.5%, with core inflation, stripped of energy and food items, expected to average between 1.5% and 2.5%.
Headline inflation in 2024 moderated to 1.8%, down from 2.5% in 2023.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said subsidies and price control were common tools to contain inflation in the short term.
However, he said this tool if used excessively, can lead to price signal distortions. The price signal contains information on how businesses and households should respond, he said.
“For instance, if the price is high, consumers would cut back on their spending. For businesses, they might see this as an opportunity to venture into such business which then can lead to higher supplies and eventually lower prices.
“Ideally, the market should be the deciding factor for prices, but it has to be regulated.
“This is where the government could come in to ensure that the market is fair, transparent and efficient.
“There should not be any elements of corruption and monopoly as this can raise the cost of doing business.
“The government should focus on capacity building as well,” he said.
For instance, Mohd Afzanizam said Malaysia has been importing a considerable amount of food products where its import bill in agri-food had reached RM93.8bil in 2024.
Exports, meanwhile, were only at RM54.5bil.
“This resulted in a trade deficit of RM39.3bil last year and the figure has been widening consistently every year,” he said.
He said this clearly suggests that the government needs to revive the agricultural sector holistically.
“So, the government’s role is to ensure supply is sufficient, the price mechanism is fair, the industry players are competent and there are no malpractices in business such as hoarding, price manipulation and the existence of a cartel,” he noted.
Lavanya said people perceived cost-of-living as elevated because wage growth has lagged inflation, citing Bank Negara’s recently released 2024 annual report, which said nominal wage trailed the inflation rate.
“We forecast higher average headline inflation of 2.7% year-on-year (y-o-y) in 2025 versus 1.8% in 2024 and this is mainly from RON95 rationalisation,” she said.
Meanwhile, MARC Ratings Bhd chief economist Ray Choy said Malaysia has consistently remained aware of inflationary risks while calibrating both monetary and fiscal policies.
“If interest rates are too low, they can lead to excessive credit growth and increased spending driven by borrowing. In Malaysia, the approach to interest rate adjustments has been gradual, considering the need to maintain an appropriate level of economic growth.
MARC Ratings Bhd chief economist Ray Choy“Subsidy retargeting in Malaysia reflects the priority of improving wealth distribution. The current policy aims to reduce subsidies for high-income individuals and redirect the savings to lower-income groups, who will continue to benefit from subsidies.
“Under this approach, inflation rates will vary across different income segments, with some higher-income individuals experiencing a greater personal inflation rate due to subsidy reductions, while lower-income individuals continue to receive fuel subsidies,” he said.
Nonetheless, he said the upward pressure on inflation from subsidy retargeting affects a smaller proportion of the population, meaning Malaysia’s overall inflation rate will not be significantly impacted.
“Other measures to combat rising inflation include enforcement against profiteering, supported by the increasing use of big data to enhance the government’s price analysis capabilities.
“Enhancing market structure by promoting competition or introducing new entrants into oligopolistic industries is another useful policy option to consider,” Choy noted.
Centre for Market Education CEO Carmelo FerlitoCentre for Market Education CEO Carmelo Ferlito said monetary policy has so far been effective in controlling prices. “I tend to believe that, in the current scenario, fiscal policy is potentially a much bigger threat to price stability than monetary policy, because of the natural tendency of governments to overspend.
“Targeted subsidies and tax breaks are not effective measures to control inflation but rather potential sources for higher prices, and therefore it is imperative for the government to cut spending elsewhere if they want to avoid those measures to make situation worse.
The best way that the government has to control inflation is to avoid deficit spending and the emission of debt, together with introducing a constitutional principle of compulsory balanced budgets,” he said.
